T H E W O R L D ' S T R U S T E D N A M E I N W E I G H T L O S S
Annual Report 2004
Our in-meeting products fit our members’ needs
and help them achieve their weight-loss and
weight-maintenance goals.
Weight Watchers is working together with
leading health organizations to combat the
growing obesity epidemic.
Weight Watchers is a founding sponsor of
the American Cancer Society’s® Great American
Weigh In®, a national awareness campaign to help Americans
understand the link between obesity and the risk of serious diseases such as cancer.
Weight Watchers is a founding board member of the National Business Group on Health’s Institute
on the Costs and Health Effects of Obesity, an organization that strives to help corporate America
tackle obesity in the workplace. In 2004, Weight
Watchers collaborated on the production of a
guidebook entitled, “Guide to Starting a Weight-
Management Program in Your Company”.
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Dear Shareholders
Linda A. Huett
President and
Chief Executive Officer
Looking back over more than four decades since the first Weight
Watchers® meeting, our Company has grown and evolved dramatically.
The need for our services is just as great today as it was then, in fact,
it is even greater. People from a variety of cultures continue to search for
help in meeting their weight-loss goals. And, most importantly, Weight
Watchers remains the only commercial weight-loss program backed by credible scientific evidence
demonstrating that our programs actually work. It’s no wonder that we are the world’s leading
provider of weight-loss services.
According to the World Health Organization, up to 1.7 billion people worldwide are overweight or
obese. In the United States alone, the Centers for Disease Control and Prevention estimates that
64% of the adult population is overweight or obese. These numbers are cause for serious concern, as
dozens of scientific studies have linked obesity to a series of conditions that include several forms of
cancer, stroke, type 2 diabetes, and heart disease.
There is no question that the demand for weight-loss services is growing and that people from all
walks of life are searching for weight-loss solutions. Our Program works and we have hundreds
of thousands of Lifetime Members to prove it. Only Weight Watchers offers the sustainable solution
for weight loss based on group support, behavior modification, healthful eating, and exercise.
The recent rise of the low-carb, self-help diet craze was fueled by people’s desire for a quick fix.
But, as we predicted, the low-carb phenomenon is now in decline as people have figured out that such
approaches are neither healthy nor sustainable. Despite the market share challenges that this crash
diet produced, we never wavered from our proven approach to weight loss and weight management.
Our 2004 North American organic attendance declines gradually lessened as the year progressed
and we expect organic attendance trends to return to positive territory in 2005. The fact is that people
keep coming back to Weight Watchers, even after they have tried the latest diet fads.
For the full year, excluding the consolidation impact of WeightWatchers.com, we achieved revenue
of $966 million and net income of $179 million. We were solidly profitable with a 2004 operating
income margin of 30%, a strong performance in the face of short-term competitive pressure from the
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low-carb diet craze. These results speak to the health of our business and
the resilience of our brand and philosophy.
In 2004, we expanded our marketing and public relations efforts to
better educate the public about the science behind our weight-loss and
weight-management methods. In May 2004, a study presented at the European
Association for the Study of Obesity in Prague evaluated the success of members
who had completed the weight-loss and maintenance phases of the Weight Watchers program.
This study, which analyzed data from our Lifetime Members, showed that once weight is reduced it
can be kept off for the long term.
More recently, Weight Watchers was cited in a study by Drs. Adam Gilden Tsai and Thomas A.
Wadden, at the University of Pennsylvania, which examined ten popular weight-loss methods,
including the largest commercial non-medical, weight-loss programs in the United States. The study,
the results of which were published in The Annals of Internal Medicine, concluded that Weight Watchers
was the only method that has rigorous scientific evidence to demonstrate its weight-loss efficacy.
On the heels of these empirical studies, we received widespread media attention and praise for our
recently published book, Weight Loss that Lasts, co-written by Karen Miller-Kovach, our Chief
Scientific Officer, and Dr. James M. Rippe, Associate Professor of Medicine at the Tufts University
School of Medicine and Founder and Director of the Rippe Lifestyle Institute, one of the nation’s
largest nutrition, exercise, and lifestyle medicine research organizations. Among other helpful infor-
mation, the book offers testimonials from Weight Watchers members and educates readers on how
to break through ten common myths that hold people back from reaching their weight-loss goals.
In 2004 we took a number of steps to further strengthen our program. We launched the
TurnAround™ program in North America, further customizing
our food plans to the needs of our members. We expanded our
brand’s reach through several food product licensing agreements.
We extended our outreach to employers and their employees
through our Corporate Solutions offerings. And, we continued
to expand our presence in several international markets.
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We offer scientifically based, safe, and effective methods for weight loss and long-term weight
maintenance. However, beyond medical research, our members and meeting Leaders represent our
most important resources. We are constantly listening and responding to their ever-changing
dieting needs. We seek to give our members a variety of options to customize and fit our program
into their lifestyle. Our August launch of the TurnAround program reflects the flexibility of our
business model and our ongoing efforts to offer our members a balanced approach to weight loss.
Our members and our service providers responded positively to the TurnAround program in
2004, and we expect it to continue to contribute to the improvement in North American attendance
in 2005.
In the past year we expanded the presence of the Weight Watchers
brand through licensing agreements in the United States with a number
of noted consumer products companies, including Organic Milling,
Wells Dairy, Weston Bakery, and Dawn Foods. These new Weight
Watchers branded products, complete with low POINTS® values,
include a variety of ice cream treats, breads, snack cakes and muffins,
and breakfast cereals. These great-tasting foods in the “better-for-you”
category help weight-conscious consumers by offering sensible food choices
that can easily be integrated into a balanced diet.
In 2004, Applebee’s® launched the Weight Watchers section of its menu at its 1,600 restaurants
nationwide. This licensing initiative expands our reach beyond our traditional audience, finding
people who may not be searching for a weight-loss plan but who are interested in healthy dining
alternatives. Initial reception to the Weight Watchers offering at Applebee’s, as well as to our other
licensed products has been extremely encouraging.
Our Corporate Solutions offerings got off to a promising start in 2004. This line of business offers
employers and their employees a complete suite of weight-loss solutions. Employees can attend
a series of weekly meetings at their workplace, connect to WeightWatchers.com, receive vouchers
to attend local meetings outside their workplace, or follow our program using an At Home kit.
As overweight and obese employees have higher health-care costs and reduced productivity, it is no
surprise that national companies are turning to us to help their employees achieve and maintain a
healthy weight.
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Looking ahead, we see many avenues of growth for our business.
Our sound financial position and unique business model allows
us to grow and adapt, while maintaining high margins and
producing significant cash flow and net income. We will continue
to seek avenues to deliver shareholder value. In 2004, we utilized
a substantial portion of our $234 million in cash from operating
activities to fund accretive purchases of several franchises and also to
repurchase our shares.
We remain focused on helping the overweight population through innovative programs, continuous
enhancements to the member experience, and newly licensed products, as well as through brand
building and motivational marketing strategies. We believe we are taking the right steps to support
our brand and enhance our growth potential over the long term. We will never waiver from our
commitment to offer healthy, scientifically based, and effective approaches to weight loss. The
credibility of our program is everything. It is why our business has thrived for over four decades
and why we are so optimistic about the future.
I would like to thank all of our members, leaders and service providers, employees, directors, and
shareholders for their dedication and support in maintaining our position as the world’s most-
recognized and trusted weight-loss service.
Sincerely,
Linda Huett
President and
Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(cid:1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2005.
or
(cid:2)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File no. 000-03389
Weight Watchers International, Inc.
(Exact name of Registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
11-6040273
(I.R.S. Employer
Identification No.)
175 Crossways Park West, Woodbury, New York 11797-2055
(Zip code)
(Address of principal executive offices)
Registrant’s telephone number, including area code: (516) 390-1400
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, no par value
Preferred Stock Purchase Rights
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes (cid:1) No (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (cid:1)
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes (cid:1) No (cid:2)
The aggregate market value, as determined by the last sale price of $38.53 on the New York Stock
Exchange, of the voting stock held by non-affiliates (shareholders holding less than 5% of the
outstanding Common Stock, excluding directors and officers), as of July 2, 2004 was $1,222,084,445.
The number of shares outstanding of common stock as of January 31, 2005 was 102,667,990.
Documents incorporated by reference: Portions of the registrant’s definitive Proxy Statement for its
2005 annual meeting of stockholders scheduled to be held on April 29, 2005 are incorporated herein by
reference in Part III, Item 14. Such Proxy Statement will be filed with the SEC no later than 120 days
after the registrant’s fiscal year ended January 1, 2005.
Item 1. Business
PART I
We are a leading global branded consumer company and the global leader in providing healthy
weight management services, operating in 30 countries around the world for over 40 years. Our
programs help people lose weight and maintain a healthy weight and, as a result, improve their health,
enhance their lifestyles and build self-confidence. At the heart of our business are weekly meetings,
which promote weight loss through education and group support in conjunction with a flexible, healthy
diet and exercise method. Each week, approximately 1.5 million people attend approximately 46,000
Weight Watchers meetings around the world, which are run by approximately 15,300 classroom leaders.
Our classroom leaders teach, inspire, motivate and act as role models for our members.
We conduct our business through a combination of company-owned and franchise operations, with
company-owned operations accounting for approximately 78% of total worldwide attendance in 2004.
In the 1960’s, we pursued an aggressive franchising strategy with respect to our classroom operations to
rapidly grow our geographic presence and build market share. We believe that our early franchising
strategy was very effective in establishing our brand as the world’s leading weight-loss program.
We have experienced strong growth in sales and profits since we made the strategic decision to
re-focus our meetings exclusively on our group education approach. We discontinued the in-meeting
sale of pre-packaged frozen meals added in 1990 in North American company-owned, or NACO,
operations, by our previous owner and modernized our program to adapt it to contemporary lifestyles.
Our members typically enroll to attend consecutive weekly meetings and have historically
demonstrated a consistent re-enrollment pattern across many years. We believe that our members’
repeat enrollment and attendance patterns and our large existing member base together with the
growth in first time members represent strong potential for future growth. We also believe that we can
expand our customer base by developing new products and services designed to meet the needs of a
broader audience.
Our Billion Dollar Brand
Weight Watchers is the leading global weight-loss brand with retail sales of over $2.5 billion in 2004,
including sales by licensees and franchisees, and nearly universal awareness among women in the U.S.
We have built our business and brand on the following core principles:
Effective
Healthy
Supportive
Flexible
Balanced
Weight Watchers Meetings
Clinically proven
Medically recommended
Helping members help each other
Compatible with modern lifestyles
Not just a diet, an approach to life
We present our program in a series of weekly classes of approximately one hour in duration.
Classes are conveniently scheduled throughout the day. Typically, we hold classes in either meeting
rooms rented from civic or religious organizations or in leased locations.
In our classes, our leaders present our program, which combines group support and education with
a structured approach to food, activity and lifestyle modification developed by credentialed weight-loss
experts. Our 15,300 classroom leaders run our meetings and educate members on the Weight Watchers
method of successful and sustained weight loss. Our leaders also provide inspiration and motivation for
1
our members and are examples of our program’s effectiveness because they have lost weight and
maintained their weight loss on our program.
Classes typically begin with registration and a confidential weigh-in to track each member’s
progress. Leaders are trained to engage the members at the weigh-in to talk about their weight control
efforts during the previous week and to provide encouragement and advice. Part of the class is
educational, where the leader uses personal anecdotes, games or open questions to demonstrate some
of our core weight-loss strategies, such as self-belief and discipline. For the remainder of the class, the
leader focuses on a variety of topics pre-selected by us, such as seasonal weight-loss topics,
achievements people have made in the prior week and celebrating and applauding successes. Members
who have reached their weight goal are singled out for their accomplishment. Discussions can range
from dealing with a holiday office party to making time to exercise. The leader encourages substantial
class participation and discusses supporting products and materials as appropriate. At the end of the
class, new members are given special instruction in our current weight-loss plan.
Our leaders help set a member’s weight goal within a healthy range based on body mass index.
When members reach their weight goal and maintain it for six weeks, they achieve lifetime member
status. This gives them the privilege to attend our meetings free of charge as long as they maintain
their weight within a certain range. Successful members also become eligible to apply for positions as
classroom leaders. Field management and current leaders constantly identify new leaders from
members with strong interpersonal skills, personality and communication skills. Leaders are usually paid
on a commission basis.
As part of our Corporate Solutions program, we address the weight-loss needs of working people by
providing weight-loss services at their place of employment. In many cases, employers subsidize
employee participation and typically provide meeting space without charge.
Our Approach
Our approach has always been based on four core elements:
(cid:127) Group support
(cid:127) Behavior modification
(cid:127) Healthful eating
(cid:127) Exercise
Group Support
The group support system remains the cornerstone of our classes. Members provide each other
support by sharing their experiences, their encouragement and empathy with other people experiencing
similar weight-loss challenges. This group support provides the reassurance that no one must overcome
their weight-loss challenge alone. Group support assists members in dealing with issues such as
emotional-eating and finding time to exercise. We facilitate this support through interactive meetings
that encourage learning through group activities and discussions.
Behavior Modification
Behavior modification and education on eating and exercise habits have also always been key
elements of our program. We use motivation, education and support to help members manage their
weight and to change their habits. Discussions on topics such as staying motivated, how to avoid
overeating and managing stress offer members valuable insight on how to stay on our program while
dealing with the realities of everyday life. Our U.S. members also currently learn ‘‘Tools for Living,’’ a
2
set of 10 techniques to assist in handling the barriers to long-term weight loss. Our international
members learn similar principles and receive similar publications.
Healthful Eating
Our food plans allow our members to eat regular meals instead of pre-packaged meals. By giving
members the freedom to choose what to eat, our plans are flexible and adjustable to modern lifestyles.
In order to keep sound nutrition at the forefront of weight-loss science, our food plans are designed in
consultation with doctors and other scientific advisors. We continually strive to improve our methods by
periodically testing and introducing new features based upon learnings from our members’ real-life
experiences and the expanding body of scientific research. We also provide our members with
information regarding good nutrition.
For our food plans based on the POINTS(cid:3) Food System, each food is assigned a POINTS value
based on its nutritional content. Members are given a range of POINTS values to use each day on
whatever combination of food they prefer so long as the total does not exceed the goal. While no food
is forbidden, our POINTS-based plans encourage members to eat a wide variety of foods in amounts
that promote healthy weight loss. The POINTS plans help members choose foods that are low in fat,
high in complex carbohydrates and moderate in protein. Members can carry-forward unused POINTS
values and thus have flexibility to participate in special occasions and special meals.
Our Core Plan, launched in the U.S. in August 2004, controls calories by focusing on a core list of
wholesome, nutritious foods without tracking or counting. The list includes foods from all the food
groups to ensure that nutritional requirements are met. To maximize livability on the Core Plan, people
can have occasional treats in controlled amounts.
We customize our plans from country to country in order to suit local tastes and nutritional
concerns, as well as package labeling differences between countries. Our current United States plan was
launched in Fall 2004 and is branded TurnAround(cid:4). Our current United Kingdom plan launched in
Winter 2005 is branded Switch(cid:4), and our current plan in Continental Europe, launched in Fall 2004, is
branded Flexi Points, Eat and Enjoy. We typically launch an innovation in a region’s plan every two
years. We attempt to stagger our innovations so they do not occur in all markets at the same time.
Exercise
Exercise is an important component of weight loss and our overall program to lose and maintain
weight. Our classroom leaders emphasize the importance of exercise to weight loss and in leading a
healthy, balanced lifestyle. In addition, our program is based on POINTS values that take into account
the type and amount of exercise done and allow members to use those POINTS values as part of their
menu planning. Our United States members currently receive ‘‘Get Moving,’’ which is designed to
promote exercise and activity outside of the classroom. This exercise guide is consistent with the
recommendations for physical activity outlined by the 2005 U.S. Dietary Guidelines, Centers for
Disease Control and Prevention and the American College of Sports Medicine. International members
receive similar information.
Additional Delivery Methods
We have developed additional delivery methods for people who, either through circumstance or
personal preference, do not attend our classes. For example, we have developed program cookbooks
and an At Home self-help product that provide information on our plans and guidance on weight loss,
as well as CD-ROM versions of our food plans for the United Kingdom, Continental Europe and
Australia.
3
In the United States during 2001, our affiliate and licensee, WeightWatchers.com, launched two
online paid subscription products, Weight Watchers eTools and Weight Watchers Online. Weight Watchers
eTools is designed to supplement and strengthen the Weight Watchers classroom business. Weight
Watchers eTools is a suite of electronic tools available only to Weight Watchers members, designed to
help them achieve greater success by making it even easier to follow TurnAround and by reinforcing our
weight-loss approach between meetings. Weight Watchers Online offers information on the TurnAround
program, POINTS values, content on various weight-loss subjects, professionally-developed low-POINTS
recipes and weekly meal plans for different POINTS ranges. In addition, Weight Watchers Online
provides an online journal, an online POINTS calculator, a recipe POINTS calculator, a weight tracker
and progress charts and targeted messages to help subscribers achieve their weight-loss goals. This
product targets self-help dieters.
Our Corporate Solutions line of weight-loss offerings also includes prepaid local meeting coupons,
Weight Watchers online subscriptions and the At Home kit.
Product Sales
We sell a range of proprietary products, including snack bars, books, CD-ROMS and POINTS
calculators that are consistent with our brand image. We sell our products primarily through our
classroom operations and to our franchisees. In fiscal 2004, sales of our proprietary products
represented 27% of our revenues. We have focused on a group of products that complement the
Weight Watchers program. We intend to continue to optimize our product offerings by updating
existing products and selectively introducing new products.
Company-Owned Operations
Our North American operations consist of approximately 4,100 meeting locations that generated
$373.1 million in meeting fee revenue for the fiscal year ended January 1, 2005. North America
attendance was 32.3 million for the fiscal year ended January 1, 2005.
International operations consist of approximately 10,000 meeting locations outside the United
States that generated $256.0 million in meeting fee revenue for the fiscal year ended January 1, 2005.
International attendance was 27.6 million for the fiscal year ended January 1, 2005.
Franchise Operations
We have enjoyed a mutually beneficial relationship with our franchisees over many years. In our
early years, we used an aggressive franchising strategy to quickly establish a meeting infrastructure
throughout the world to pre-empt competition. Our franchised operations represented approximately
22% of our total worldwide attendance for fiscal 2004. We estimate that, in fiscal 2004, these franchised
operations attracted attendance of over 16 million. Franchisees typically pay us a fee equal to 10% of
their meeting fee revenues.
Our franchisees are responsible for operating classes in their territory using the program and
marketing materials we have developed. We provide a central support system for the program and our
brand. Franchisees purchase products from us at wholesale prices for resale directly to members.
Franchisees are obligated to adhere strictly to our program content guidelines, with the freedom to
control pricing, meeting locations, operational structure and local promotions. Franchisees provide local
operational expertise, advertising and public relations. Franchisees are required to keep accurate
records that we audit on a periodic basis. Most franchise agreements are perpetual and can be
terminated only upon a material breach or bankruptcy of the franchisee.
We do not intend to award new franchise territories. From time to time, we repurchase franchise
territories.
4
Licensing
As a highly recognized global brand, Weight Watchers is a powerful marketing tool for us and for
third parties. We currently license our Weight Watchers brand in certain categories of food, books and
other products. This year, for example, we introduced Weight Watchers branded meal, snack and
dessert products developed in partnership with noted food manufacturers. We believe that opportunities
exist to further capitalize on the strength of our brand and the loyalty of our members by more
aggressively licensing our brand while maintaining its integrity.
Food and Beverage Trademarks
At the time of our acquisition by Artal Luxembourg, we and H.J. Heinz Company (‘‘Heinz’’)
formed WW Foods, LLC, or WW Foods, a 50-50 joint venture, under which we maintain and preserve
the Weight Watchers trademarks covering food and beverages. WW Foods granted an exclusive,
worldwide, royalty-free, perpetual license to Heinz to use the food and beverage trademarks for use on
food products in its core categories (including frozen dinners, frozen breakfasts, frozen desserts
(excluding ice cream), frozen pizza and pizza snacks, frozen potatoes, frozen rice products, ketchup,
tomato sauce, gravy, canned tuna or salmon products, soup, noodles (excluding pasta), and canned
beans and pasta products), and for use only in Australia and New Zealand in certain additional food
product categories (including mayonnaise, frozen vegetables, canned fruits and canned vegetables). The
food and beverage related trademarks may be used by Heinz only on Heinz licensed products that have
been specially formulated to be compatible with our dietary principles. We have been granted a similar
license by WW Foods on all other food and beverage products.
There are certain food and beverage trademarks covering the Heinz core categories that because
of local laws, could not be effectively transferred to WW Foods. These include trademarks registered in
multiple trademark classes and certain other trademarks. We maintain legal ownership of these
trademarks and hold them in custody for the benefit of WW Foods. Heinz retains in its core categories
(as described in the paragraph above) an exclusive royalty-free license to use these food and beverage
trademarks that we hold in custody for WW Foods. We have undertaken to contribute any of these
custodial trademarks (or any portion covering food and beverage products) to WW Foods if WW
Foods determines that the transfer may be achieved under local law. Heinz paid us an annual fee of
$1.2 million until September 2004 in exchange for our serving as the custodian of the food and
beverage trademarks held for the benefit of WW Foods.
Other Marks
We maintain exclusive ownership of all service marks and trademarks other than food and
beverage trademarks and, except for the rights granted to WW Foods and to Heinz, we have the
exclusive right to use all these marks for any purpose, including their use as trademarks for all products
other than food and beverage products.
Program Standards, Program Information and Related Trademarks
We have exclusive control of the dietary principles to be followed in any eating or lifestyle regimen
to facilitate weight loss or weight control employed by the classroom business. We also maintain
exclusive ownership of all program information, consisting of information and know-how relating to any
weight-loss program, terminology and trademarks or service marks used to identify the programs or
terminology. We granted an exclusive, worldwide, royalty-free license to WW Foods, for sublicense to
Heinz in its core categories as described above, to use the terminology and the related trademarks and
service marks, and we provided WW Foods (which provided Heinz) with access to and a right to use
this information as may be reasonably necessary to develop, manufacture or market food and beverage
products in accordance with our dietary principles. Heinz granted a worldwide, royalty-free license to
5
WW Foods to use improvements that Heinz may develop in the course of its use of our dietary
principles or weight-loss program, which WW Foods sublicensed in turn to us.
Third Party Licenses
During the period that Heinz owned our company, it developed a number of food product lines
under the Weight Watchers brand, with hundreds of millions of dollars of retail sales, mostly in the
United States and in the United Kingdom. Heinz, however, did not actively license the Weight Watchers
brand to other food companies. For the period from our acquisition by Artal Luxembourg until
September 29, 2004, we assigned to Heinz all licenses that we had previously granted to third parties,
and Heinz retained all existing sublicenses granted by it to third parties for various food products
outside of Heinz core categories. Until September 29, 2004, Heinz received royalty payments of over
$4 million per year from this existing portfolio of third-party licenses. Beginning May 3, 2001, we
managed these third party licenses on behalf of Heinz for a fee equal to 5% of the royalties from these
licenses. After September 29, 2004, these licenses reverted to us and the associated royalty payments
are payable to us in their entirety.
WeightWatchers.com License
We granted an exclusive license to WeightWatchers.com to use our trademarks, copyrights and
domain names in electronic media in connection with its online weight-loss business. The license
agreement provides us with control over the use of our intellectual property. In particular we have the
right to approve WeightWatchers.com’s e-commerce activities, marketing programs, privacy policy and
materials publicly displayed on the Internet. These controls are designed to protect the value of our
intellectual property. See ‘‘WeightWatchers.com Intellectual Property License’’ in Item 13.
During 2001, WeightWatchers.com launched two online paid subscription products, Weight Watchers
Online and Weight Watchers eTools in the U.S. Weight Watchers Online is a self-help product based on
our current Weight Watchers plan designed to attract consumers who choose the Weight Watchers plan
but not the Weight Watchers meeting services. We believe that Weight Watchers Online has increased
and will continue to increase the popularity of our brand among dieters and strengthen our brand in
the entire weight-loss market. Weight Watchers eTools is designed to supplement and strengthen the
Weight Watchers classroom business. Weight Watchers eTools is a suite of electronic tools available only
to Weight Watchers members, designed to help them achieve greater success by making it even easier
to follow our food programs and by reinforcing our weight-loss approach between meetings.
During July 2002 and September 2002, WeightWatchers.com launched an upgrade to its United
Kingdom and Canadian web sites, including the offering of two online paid subscription products. In
January 2004, WeightWatchers.com launched similar subscription products in Germany. These products
have similar functionality to the existing United States products, but are tailored specifically to the
United Kingdom, Canadian and German markets, respectively.
Weight Watchers International owns 20.1% of WeightWatchers.com, or approximately 38% on a
fully diluted basis (including the exercise of all options and all warrants). In January 2002, Weight
Watchers International began receiving royalties of 10% of WeightWatchers.com’s net revenues and
during 2004, Weight Watchers International earned $8.2 million in royalties from WeightWatchers.com.
In Items 1-14 of this Annual Report on Form 10-K, ‘‘Weight Watchers,’’ ‘‘we,’’ ‘‘us’’ and ‘‘our’’
refers to Weight Watchers International, Inc. and its subsidiaries and does not include
WeightWatchers.com, Inc. Please see Note 1 of our Consolidated Financial Statements on page F-6 for
a definition of the terms ‘‘WWI’’ and ‘‘the Company’’ as used in Item 15.
6
Marketing and Promotion
Member Referrals
An important source of new members is through word-of-mouth generated by our current and
former members. Over our 40-year operating history, we have created a powerful referral network of
loyal members. These referrals, combined with our strong brand and the effectiveness of our program,
enable us to efficiently attract new and returning members.
Media Advertising
Our advertising enhances our brand image and awareness and motivates both former members and
potential new members to join our program. Our advertising schedule supports the three key
enrollment-generating diet seasons of the year: winter, spring and fall. We allocate our media
advertising on a market-by-market basis, as well as by media vehicle (television, radio, magazines and
newspapers), taking into account the target market and the effectiveness of the medium.
Direct Mail
Direct mail is a critical element of our marketing because it targets potential returning members.
We maintain databases of current and former members in each country in which we operate, which we
use to focus our direct mailings. During fiscal 2004, our NACO operations sent over 23 million pieces
of direct mail. Most of these mailings are timed to coincide with the start of the diet seasons and are
intended to encourage former members to re-enroll.
Pricing Structure and Promotions
Our most popular payment structure is a ‘‘pay-as-you-go’’ arrangement. Typically, a new member
pays an initial registration fee and then a weekly fee for each class attended, although free registration
is often offered as a promotion. Our Value plan in the United States provides members with the option
of committing to consecutive weekly attendance with a lower weekly fee (with penalties for missed
classes). Our Flexible plan provides members with the option of paying a higher weekly fee without the
missed meeting penalties. We also offer discounted prepayment plans.
Public Relations and Celebrity Endorsements
The focus of our public relations efforts is through our current and former members who have
successfully lost weight on our program. Classroom leaders and successful members engage in local
promotions, information presentations and charity events to promote Weight Watchers and demonstrate
the program’s efficacy.
For many years we have also used celebrities to promote and endorse the program in different
countries. Since 1997, we have retained Sarah Ferguson, the Duchess of York, to promote and endorse
our program in North America.
In 2003, we and the American Cancer Society launched a new initiative called the Great American
Weigh-In in the United States. This annual event spreads the word that eating well, being active and
maintaining a healthy weight can reduce cancer risk.
Weight Watchers Magazine
Weight Watchers Magazine is an important branded marketing channel that is experiencing strong
growth. We re-acquired the rights to publish the magazine in February 2000 and relaunched its
publication in May 2000. Since January 2003, we have sustained its circulation at over one million. Our
most recent information from MediaMark, an industry tracking service, shows a readership of 6.45
7
readers per copy, one of the highest in the industry. In addition to generating revenues from
subscription sales and advertising, Weight Watchers Magazine reinforces the value of our brand and
serves as an important marketing tool to non-members. We also publish Weight Watchers magazines in
all of our other major markets.
WeightWatchers.com
Our affiliate and licensee, WeightWatchers.com, operates the Weight Watchers website, which is an
important global promotional channel for our brand and businesses. The website contributes value to
our classroom business by promoting our brand, advertising Weight Watchers classes and keeping
members involved with the program outside the classroom through useful offerings, such as a meeting
locator, low calorie recipes, weight-loss news articles, success stories and online forums. During fiscal
2004, an average of approximately 137,000 unique visitors per week used our Meeting Finder feature.
The Meeting Finder makes it easier than ever for our members to find a convenient meeting place and
time. WeightWatchers.com now attracts an average of over 2.5 million unique visitors per month.
Entrepreneurial Management
We run our company in a decentralized and entrepreneurial manner that allows us to develop and
test new ideas on a local basis and then implement the most successful ideas across our network. We
believe local country and regional managers are best able to develop new strategies and programs to
meet the needs of their markets. For example, local managers in the United Kingdom were responsible
for developing our POINTS-based program. In addition, many of our classroom products were
developed locally and then introduced successfully in other countries. Local managers have strong
incentives to adopt and implement the best practices of other regions and to continue to develop
innovative new programs.
Competition
The weight-loss market includes commercial weight-loss programs, self-help weight-loss diets,
products and publications, Internet-based weight-loss products, dietary supplements and meal
replacement products, weight-loss services administered by doctors, nutritionists and dieticians, surgical
procedures, weight-loss drugs and weight-loss and fitness centers for women.
Competition among commercial weight-loss programs is largely based on program recognition and
reputation and the effectiveness, safety and price of the program. In the United States, we compete
with several other companies in the commercial weight-loss industry, although we believe that the
businesses are not comparable. For example, many of these competitors’ businesses are based on the
sale of pre-packaged meals and meal replacements. Our classes use group support, education and
behavior modification to help our members change their eating habits, in conjunction with flexible food
plans that allow members the freedom to choose what they eat. There are no significant group
education-based competitors in any of our major markets, except in the United Kingdom. Even there,
we have an approximately 50% market share and approximately twice the revenues of our largest
competitor, Slimming World.
We believe that food manufacturers that produce meal replacement products are not comparable
competition because these businesses’ meal replacement products do not engender behavior
modification through education in conjunction with a flexible, healthy diet.
We also compete with various self help diets, products and publications. Beginning in 2003,
low-carb diets, such as Atkins and South Beach, gained in popularity and media exposure. These diets
advocate dramatic reductions in carbohydrates that result in calorie reduction. We believe that the
appeal of these programs has peaked and the low carb phenomenon is now in decline.
8
History
Early Development
In 1961, Jean Nidetch, the founder of our company, attended a New York City obesity clinic and
took what she learned from her personal experience at the obesity clinic and began weight-loss
meetings with a group of her overweight friends in the basement of a New York apartment building.
Under Ms. Nidetch’s leadership, the group members supported each other in their weight-loss efforts,
and word of the group’s success quickly spread. Ms. Nidetch and Al and Felice Lippert, who all
successfully lost weight through these efforts, formally launched Weight Watchers in 1963.
Heinz Ownership
Recognizing the power of the Weight Watchers brand, Heinz acquired us in 1978 in large part to
acquire the rights to our name for its food business. Through the 1980s, we operated autonomously
under Heinz, maintaining our group education focus, and our business continued to grow.
In 1990, Heinz altered our successful model by introducing the sale of pre-packaged frozen meals
through our NACO operations in response to the initial success then experienced by some of our
competitors who focused on meal replacements. These changes forced our classroom leaders to become
food sales people and retail managers for food products, detracting from their function as role models
and motivators for our members. This caused a significant drop in customer satisfaction and employee
morale, and attendance in our NACO operations declined.
In 1995, we shifted to a more decentralized management approach, allowing the management of
our international operations to develop local business strategies and program innovations. This
approach was successful and by 1996 our international growth began to accelerate. Beginning in 1997,
we restructured our NACO operations by eliminating the pre-packaged frozen meals program from our
classroom operations, improving customer service, restoring employee morale and introducing a
POINTS-based program which had been successfully introduced in the United Kingdom. Following this
return to this approach in the United States, we moved from a fixed cost structure back to a variable
cost structure and registered strong attendance growth in our NACO operations.
Artal Ownership
In September 1999, Artal Luxembourg acquired us from Heinz. Following the acquisition, our
senior management team was reorganized, key employees invested approximately $4 million in our
company and a new performance-based stock option plan was put in place. The Invus Group, LLC is
the exclusive investment advisor of Artal Luxembourg and has extensive experience with branded
consumer businesses, including the turnaround of the Keebler Foods Company.
Regulation
A number of laws and regulations govern our advertising, franchise operations and relations with
consumers. The Federal Trade Commission, or FTC, and certain states regulate advertising, disclosures
to consumers and franchisees and other consumer matters. Our customers may file actions on their
own behalf, as a class or otherwise, and may file complaints with the FTC or state or local consumer
affairs offices and these agencies may take action on their own initiative or on a referral from
consumers or others.
During the mid-1990s, the FTC filed complaints against a number of commercial weight-loss
providers alleging violations of the Federal Trade Commission Act by the use and content of
advertisements for weight-loss programs that featured testimonials, claims for program success and
safety and statements as to program costs to participants. In 1997, we entered into a consent order with
the FTC settling all contested issues raised in the complaint filed against us. The consent order
requires us to comply with certain procedures and disclosures in connection with our advertisements of
9
products and services but does not contain any admission of guilt nor require us to pay any civil
penalties or damages.
Our overseas operations and franchises are also generally subject to regulations of the applicable
country regarding the offer and sale of franchises, the content of advertising and the promotion of diet
products and programs. Most recently with the passage of the Sarbanes-Oxley Act of 2002 in the
United States, we have, like other publicly listed companies, been subject to additional compliance
requirements requiring, among other things, certain new procedures and disclosures in connection with
our internal control over financial reporting.
Future legislation or regulations, including legislation or regulations affecting our marketing and
advertising practices, relations with employees, consumers or franchisees, or our food products, could
have an adverse impact on us.
Employees and Service Providers
As of January 1, 2005, we had approximately 46,000 employees and service providers located in the
United States, the United Kingdom, Continental Europe and Australasia. None of our service providers
or employees is represented by a labor union. We consider our employee relations to be satisfactory.
Financial Information by Geographic Area
Information concerning our geographic segments is contained in Note 16 of our Consolidated
Financial Statements, attached hereto and incorporated by reference.
Corporate Information
Corporate information, press releases and our periodic reports (e.g. 10-K’s, 10-Q’s, 8-K’s) and
amendments thereto are available free of charge at www.weightwatchersinternational.com as soon as
reasonably practical after such material is electronically filed with or furnished to the SEC (i.e.,
generally the same day as the filing). Moreover, we also make available free of charge at that site the
Section 16 reports filed electronically by our officers, directors and 10% shareholders. Usually these are
publicly accessible no later than the business day following the filing.
Shareholders may request a free copy of our Code of Business Conduct and Ethics and our
Corporate Governance Guidelines at:
Weight Watchers International
Attn: Corporate Secretary
175 Crossways Park West
Woodbury, NY 11797
(516) 390-1400
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Annual Report on Form 10-K, includes
‘‘forward-looking statements,’’ within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including, in particular, the statements about our
plans, strategies and prospects under the headings ‘‘Business’’ and ‘‘Management’s Discussion and
Analysis of Financial Condition and Results of Operations.’’ We have used the words ‘‘may,’’ ‘‘will,’’
‘‘expect,’’ ‘‘anticipate,’’ ‘‘believe,’’ ‘‘estimate,’’ ‘‘plan,’’ ‘‘intend’’ and similar expressions in this Annual
Report on Form 10-K and the documents incorporated by reference to identify forward-looking
statements. We have based these forward-looking statements on our current views with respect to
future events and financial performance. Actual results could differ materially from those projected in
10
the forward-looking statements. These forward-looking statements are subject to risks, uncertainties and
assumptions, including, among other things:
(cid:127) competition, including price competition and competition with self-help, pharmaceutical, surgical,
dietary supplements and meal replacement products, and other weight-loss brands, diets,
programs and products;
(cid:127) risks associated with the relative success of our marketing and advertising;
(cid:127) risks associated with the continued attractiveness of our programs;
(cid:127) risks associated with our ability to meet our obligations related to our outstanding indebtedness;
(cid:127) risks associated with general economic conditions; and
(cid:127) legislation or regulation, more aggressive enforcement of existing legislation or regulation or a
change in the interpretation of existing legislation or regulation.
You should not put undue reliance on any forward-looking statements. You should understand that
many important factors, including those discussed under the heading ‘‘Management’s Discussion and
Analysis of Financial Condition and Results of Operations,’’ could cause our results to differ materially
from those expressed or suggested in any forward-looking statements. Except as required by law, we do
not undertake any obligation to publicly release any revisions to these forward-looking statements to
reflect events or circumstances that occur after the date of this Annual Report on Form 10-K or to
reflect the occurrence of unanticipated events.
Item 2. Properties
We are currently headquartered in Woodbury, New York in a leased office that is scheduled to
expire in 2005. In anticipation of the expiration of this lease, on October 3, 2004, we entered into an
eight-year lease agreement to relocate our corporate headquarters to New York City. Weight Watchers
Magazine is headquartered in New York, New York in a leased office that expires in 2005. In addition,
each of our four NACO regions has a small regional office under a short-term lease. Our Paramus,
New Jersey lease expires in 2007. Each of our foreign country operations generally have an office.
We typically hold our classes in third-party locations (typically meeting rooms in well-located civic
or religious organizations) or space leased in retail centers (typically leased spaces in strip malls for
short terms, generally less than five years). As of January 1, 2005, there were approximately 4,100
North America meeting locations, including approximately 3,400 third-party locations and 700 retail
centers. In the United Kingdom, there were approximately 4,500 meeting locations, with approximately
99.9% in third-party locations. In Continental Europe, there were approximately 4,500 meeting
locations, with approximately 98% in third-party locations. In Australia and New Zealand, there were
approximately 1,000 meeting locations, with approximately 97% in third-party locations.
Item 3. Legal Proceedings
On February 18, 2005, we satisfactorily settled the lawsuit with CoolBrands International, Inc.
(‘‘CoolBrands’’) and as of May 1, 2005, CoolBrands will no longer manufacture, sell, market or
distribute ice cream and frozen novelty products using our trademarks. On August 3, 2004, we filed a
lawsuit to enforce the sell-off provisions of the CoolBrands license. On August 11, 2004, CoolBrands
filed a lawsuit in the Supreme Court, State of New York, Nassau County, against us and Wells’
Dairy Inc., which is our new licensee for ice cream and frozen novelty products effective October 1,
2004.
Due to the nature of our activities, we are at times also subject to pending and threatened legal
actions that arise out of the normal course of business. In the opinion of management, based in part
upon advice of legal counsel, the disposition of all such matters is not expected to have a material
effect on our results of operations, financial condition or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our shareholders during the last quarter of the fiscal year
ended January 1, 2005.
11
PART II
Item 5. Market for Registrant’s Common Stock, Related Shareholder Matters and Issuer
Purchases of Equity Securities
Weight Watchers common stock is listed on the New York Stock Exchange or the NYSE. The
common stock trades on the NYSE under the symbol ‘‘WTW.’’ Prior to our initial public offering on
November 15, 2001, there was no established public trading market for our common stock.
The following table sets forth, for the period indicated, the high and low sales prices per share for
our common stock as reported on the New York Stock Exchange consolidated tape.
Fiscal Year ended January 1, 2005
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$43.95
$43.26
$41.95
$46.35
$35.82
$31.83
$34.05
$35.04
High
Low
Fiscal Year ended January 3, 2004
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$47.29
$48.70
$46.51
$43.06
$38.15
$40.60
$39.75
$35.28
Below is a summary of our stock repurchases during the quarter ended January 1, 2005:
High
Low
Total
Number of
Shares
Purchased(a)
Average
Price Paid
per Share
October 3 - October 30 . . . . . . . . . . . . . . . . .
October 31 - November 27 . . . . . . . . . . . . . . .
November 28 - January 1 . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $ —
38.41
40.60
$38.93
1,096,600
343,686
1,440,286
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plan(a)
—
1,096,600
343,686
1,440,286
Approximate Dollar
Value of Shares
that May Yet be
Purchased Under
the Plan
$100,176,466
58,059,118
44,104,299
$ 44,104,299
(a) On October 9, 2003, our Board of Directors authorized a program to repurchase up to
$250 million of our outstanding stock. This plan currently has no expiration date.
Holders
The approximate number of holders of record of common stock as of January 31, 2005 was 140.
This number does not include beneficial owners of our securities held in the name of nominees.
Dividends
No cash dividends were declared or paid on our common stock in fiscal 2004 or 2003. We do not
anticipate paying cash dividends in the foreseeable future. In addition, our existing debt instruments
place limitations on our ability to pay dividends. Any future determination as to the payment of
dividends will be subject to such limitations, will be at the discretion of our Board of Directors and will
depend on our results of operations, financial condition, capital requirements and other factors deemed
relevant by our Board of Directors.
Equity Compensation Plans
See Item 12 for information about equity compensation plans.
12
Item 6. Selected Financial Data
The following schedule sets forth our selected financial data for the fiscal years ended January 1,
2005, January 3, 2004, December 28, 2002 and December 29, 2001, the eight months ended
December 30, 2000, and the fiscal year ended April 29, 2000.
SELECTED FINANCIAL DATA
(In millions, except per share amounts)
Fiscal Years Ended
Eight
Months
Ended
January 1,
2005
January 3, December 28, December 29, December 30,
2004
2002
2001
2000
Revenues, net . . . . . . . . . . . . . . $1,024.9
Net income . . . . . . . . . . . . . . . . $ 183.1
Working capital (deficit) . . . . . . . $ (26.8)
Total assets . . . . . . . . . . . . . . . . $ 816.2
Long-term obligations . . . . . . . . $ 466.1
Earnings per share:
$943.9
$143.9
$ (19.5)
$770.7
$454.3
Basic . . . . . . . . . . . . . . . . . . . $
1.75
$ 1.35
Diluted . . . . . . . . . . . . . . . . . $
1.71
$ 1.31
$809.6
$143.7
$ 22.1
$609.9
$436.3
$ 1.35
$ 1.31
$623.9
$147.2
$ (24.1)
$482.9
$484.3
$ 1.34
$ 1.31
(35 Weeks)
$273.2
$ 15.0
$ 10.2
$346.2
$482.5
$ 0.13
$ 0.13
Fiscal Year
Ended
April 29,
2000
$399.5
$ 37.8
$ (0.9)
$334.2
$486.4
$ 0.20
$ 0.20
Items Affecting Comparability
Several events occurred during the fiscal years ended January 1, 2005, January 3, 2004,
December 28, 2002 and December 29, 2001, the eight months ended December 30, 2000, and the fiscal
year ended April 29, 2000 that affect the comparability of our financial statements. The nature of these
events and their impact on underlying business trends are as follows:
Consolidation of WeightWatchers.com
On April 3, 2004, we adopted the provisions of FASB Interpretation No. 46R, ‘‘Variable Interest
Entities,’’ and began consolidating the results of WeightWatchers.com. Upon adoption, we recorded a
charge of $11.9 million in the quarter ended April 3, 2004 for the cumulative effect of this accounting
change. This charge reflects the cumulative impact to our results of operations had
WeightWatchers.com been consolidated since its inception in September 1999. Beginning on April 3,
2004, our consolidated balance sheet includes the balance sheet of WeightWatchers.com. Effective at
the beginning of the second fiscal quarter of 2004, our consolidated statement of operations and
statement of cash flows include the results of WeightWatchers.com. All intercompany balances have
been eliminated.
Debt Refinancing
On August 21, 2003, we successfully completed a tender offer and consent solicitation to purchase
96.6% of our $150.0 million USD denominated ($144.9 million) and 91.6% of our A100.0 million euro
denominated (A91.6 million) 13% Senior Subordinated Notes. The consideration for the tender offer
and consent solicitation was funded from cash on hand of $57.3 million and $227.3 million of additional
borrowings under the Credit Facility.
On October 1, 2004, we repurchased and retired the remaining balance of our Senior Subordinated
Notes in the amounts of $5.1 million USD denominated and A8.4 million euro denominated. Due to
13
this early extinguishment of debt, we recognized expenses of $1.0 million in the third quarter of fiscal
2004 related to the tender premiums associated with this redemption.
On August 21, 2003, in connection with the purchase of the majority of our Senior Subordinated
Notes, we refinanced our Credit Facility as follows: Term Loans B and D and the TLC in the aggregate
amount of $204.7 million were repaid and replaced with a new Term Loan B in the amount of
$382.9 million and a new TLC in the amount of $49.1 million. Term Loan A in the amount of
$30.0 million remained in place, along with a Revolver with available borrowings up to $45.0 million.
Due to this early extinguishment of debt, we recognized expenses of $47.4 million in the third quarter
of 2003.
On January 21, 2004, we refinanced our Credit Facility as follows: the Term Loan A, Term Loan B
and the TLC in the aggregate amount of $454.2 million were repaid and replaced with a new Term
Loan B in the amount of $150.0 million and borrowings under the Revolver of $310.0 million. In
connection with this refinancing, available borrowings under the Revolver increased from $45.0 million
to $350.0 million. Due to the early extinguishment of the Term Loans resulting from this refinancing,
we recognized expenses of $3.3 million in the first quarter of fiscal 2004.
On October 19, 2004, we increased our net borrowing capacity by adding an Additional Term
Loan B to our existing Credit Facility in the amount of $150.0 million. Coterminous with the previously
existing Credit Facility, these funds were initially used to reduce borrowings under our Revolver,
resulting in no increase in our net borrowing.
Acquisitions of Washington, D.C. and Fort Worth. On May 9, 2004, we acquired certain assets of
our Washington, D.C. area franchisee for a purchase price of $30.5 million. On August 22, 2004, we
acquired certain assets of our Fort Worth franchisee for a purchase price of $30.0 million. These
acquisitions were financed through cash from operations. The acquisitions were accounted for as
purchases and, accordingly, earnings from these franchises have been included in our consolidated
operating results since the respective dates of the acquisitions.
Acquisitions of WW Group and Dallas/New Mexico. On March 30, 2003, we acquired certain assets
of eight of the fifteen franchises of The WW Group, Inc. and its affiliates (the ‘‘WW Group’’) for an
aggregate purchase price of $180.7 million. The acquisition was financed through cash and additional
borrowings of $85 million. On November 30, 2003, we acquired certain assets of our franchises in
Dallas and New Mexico for a total purchase price of $27.2 million. This acquisition was financed
through cash from operations. The acquisition was accounted for as a purchase and, accordingly,
earnings from these franchises have been included in our consolidated operating results since the date
of acquisition.
Acquisitions of North Jersey, San Diego and Eastern North Carolina. On January 18, 2002, we
acquired the franchise territory and certain business assets of our franchise in North Jersey for an
aggregate purchase price of $46.5 million. The acquisition was financed through additional borrowings
that were subsequently repaid by the end of the second quarter of 2002. On July 2, 2002 and
September 1, 2002, we acquired the assets of our franchises in San Diego and eastern North Carolina
for a total purchase price of $11.0 and $10.6 million, respectively. These acquisitions were financed
through cash from operations. The acquisitions were accounted for as purchases and, accordingly,
earnings from these franchises have been included in our consolidated operating results since the
respective dates of the acquisitions.
Reversal of Tax Valuation Allowance. During the fourth quarter of fiscal 2001, we reversed the
remaining tax valuation allowance set up in conjunction with the acquisition by Artal Luxembourg in
1999. At the time of the acquisition, we determined that it was more likely than not that a portion of
the deferred tax asset would not be utilized. Therefore, a valuation allowance of approximately
$72.1 million was established against the corresponding deferred tax asset. Based on our performance
14
since the acquisition, we determined that the valuation allowance was no longer required. Accordingly,
the provision for taxes for the fiscal year ended December 29, 2001 included a one-time reversal
(credit) of the remaining balance of the valuation allowance of $71.9 million.
Acquisition of Weighco. On January 16, 2001, we acquired the franchised territories and certain
business assets of Weighco for an aggregate purchase price of $83.8 million. The acquisition was
financed through additional borrowings of $60.0 million and cash from operations. The acquisition has
been accounted for as a purchase and, accordingly, Weighco’s earnings have been included in our
consolidated operating results since the date of acquisition.
Change in Fiscal Year. Effective April 30, 2000, we changed our fiscal year end from the last
Saturday in April to the Saturday closest to December 31 and eliminated a one month reporting lag for
certain foreign subsidiaries. The results of operations for these foreign subsidiaries have been adjusted
for the eight months ended December 30, 2000. The effect on our net income for these subsidiaries for
the period March 31, 2000 through April 29, 2000 was $1.1 million and was adjusted to the opening
accumulated deficit at April 30, 2000.
Recapitalization. On September 29, 1999, as part of our acquisition by Artal Luxembourg, we
entered into a recapitalization and stock purchase agreement, or the Recapitalization, with our former
parent, Heinz. In connection with the Recapitalization, we effectuated a stock split of 58.7 shares for
each share outstanding. We then redeemed 164.4 million shares of common stock from Heinz for
$349.5 million. The $349.5 million consisted of $324.5 million of cash and $25.0 million of our
redeemable Series A Preferred Stock. After redemption, Artal Luxembourg purchased 94% of our
remaining common stock from Heinz for $223.7 million. The recapitalization and stock purchase was
financed through borrowings under credit facilities amounting to approximately $237.0 million and by
issuing senior subordinated notes amounting to $255.0 million. In connection with the Recapitalization,
we incurred approximately $8.3 million in transaction costs, which were included in our results of
operations for the fiscal year ended April 29, 2000.
15
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading provider of weight-loss services, operating in 30 countries around the world. We
conduct our business through a combination of company-owned and franchise operations, with
company-owned operations accounting for 78% of total worldwide attendance for the fiscal year ended
January 1, 2005. 59% of our revenues were generated by our U.S. operations, and the remaining 41%
of our revenues resulted from our international operations. We derive our revenues principally from:
(cid:127) Meeting fees. Our members pay us a weekly fee to attend our classes.
(cid:127) Product sales. We sell proprietary products that complement our program, such as snack bars,
books, CD-ROMs and POINTS calculators, to our members and franchisees.
(cid:127) Franchise royalties. Our franchisees typically pay us a royalty fee of 10% of their meeting fee
revenues.
(cid:127) Online subscription fees. WeightWatchers.com generates revenue from monthly subscriptions to its
web site.
(cid:127) Other. We license our brand for certain foods, books and other products. We also generate
revenues from the publishing of books and magazines and third-party advertising.
The following table sets forth our revenues by category for the 2004, 2003, 2002 and 2001 fiscal
years, the eight months ended December 30, 2000 and the 2000 fiscal year.
Revenue Sources
Eight Months Fiscal Year
Fiscal Years Ended
Ended
January 1, January 3, December 28, December 29, December 30,
2005
2004
2002
NACO meetings fees . . . . . . . . . . . . . . $ 373.1
International company-owned meeting
$392.4
$350.7
fees . . . . . . . . . . . . . . . . . . . . . . . .
Product sales
. . . . . . . . . . . . . . . . . . .
Franchise royalties . . . . . . . . . . . . . . . .
Online subscription fees . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Other
256.0
274.6
18.8
65.0
37.4
214.8
276.8
24.9
—
35.0
170.0
237.6
31.3
—
20.0
2001
$262.5
153.2
170.4
28.3
—
9.5
Ended
April 29,
2000
2000
$ 96.8
$130.8
87.3
66.4
17.7
—
5.0
152.7
84.2
25.8
—
6.0
Total
. . . . . . . . . . . . . . . . . . . . . . . . . $1,024.9
$943.9
$809.6
$623.9
$273.2
$399.5
After our acquisition by Artal Luxembourg in 1999, we reorganized our management and
strengthened our strategic focus. Since April 2000, our revenues have increased at a compound annual
growth rate of 22.3% as shown in the chart above. Our operating income margin has grown from
21.9% for the year ended April 29, 2000 to 29.8% in fiscal 2004 (on a stand-alone basis excluding
WeightWatchers.com, WWI’s operating income margin was 30.0%). The increases are principally a
result of:
(cid:127) Increased NACO classroom attendance. As a result of our decision to re-focus our meetings
exclusively on our group education approach and to introduce into NACO our POINTS-based
program developed in the United Kingdom and to opportunistically acquire our franchises, our
NACO classroom attendance, including the impact of our acquisitions, grew between April 2000
and fiscal 2004 at a compound annual rate of 21.1%. Including acquisitions of our franchises
that were made over this period (WW Group and Weighco and those in Fort Worth,
16
Washington, D.C., Dallas, New Mexico, North Jersey, San Diego and Eastern North Carolina),
our attendance grew from 13.3 million in April 2000 to 32.3 million in 2004.
(cid:127) Accelerated growth in Continental Europe. In Continental Europe, we have accelerated growth by
adapting our business model to local conditions, implementing more aggressive marketing
programs tailored to the local markets and increasing the number of meetings ahead of
anticipated demand. Between April 2000 and fiscal 2004, attendance in our Continental
European operations grew at a compound annual rate of 13.9%.
(cid:127) Increased product sales. We have increased our product sales by 226% from April 2000 to fiscal
2004 as a result of our growing attendance and introducing new products. In our meetings, we
have increased average product sales per attendance from $2.03 to $3.69 over the same period.
As shown in the chart below, our worldwide attendance (including acquisitions of franchises) in
our company-owned operations has grown by 80%, from 33.3 million in the year ended April 29, 2000
to 59.9 million in fiscal 2004.
Attendance in Company-Owned Operations
Fiscal Years Ended
Twelve
Months
Ended
Eight
Months
Ended
Fiscal Year
Ended
January 1,
2005
(52 weeks)
32.3
13.0
11.2
3.4
January 3, December 28, December 29, December 30, December 30, April 29,
2004
2002
2001
2000
2000
2000
(53 weeks)
34.6
12.8
10.1
3.3
(52 weeks)
30.8
11.9
9.2
3.4
(52 weeks)
23.5
11.6
8.7
3.2
(54 weeks)
14.3
11.2
7.0
3.2
(35 weeks)
8.9
7.0
4.6
1.9
(53 weeks)
13.3
10.6
6.1
3.3
North America . . . . . . . .
United Kingdom . . . . . . .
Continental Europe . . . .
Other International . . . . .
Total . . . . . . . . . . . . . . .
59.9
60.8
55.3
47.0
35.7
22.4
33.3
During the fiscal years ended January 1, 2005 and January 3, 2004, we acquired the franchised
territories and certain business assets of four franchisees as outlined below:
Acquisitions
Purchase
Price
Closing Date
WW Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dallas/New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington, D.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fort Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$180.7 March 30, 2003
$ 27.2 November 30, 2003
$ 30.5 May 9, 2004
$ 30.0 August 22, 2004
These acquisitions have been accounted for under the purchase method of accounting.
Accordingly, their results of operations have been included in our consolidated operating results since
the dates of the completion of their respective acquisitions.
Critical Accounting Policies
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ is
based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’). The
preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those
17
related to inventories, the impairment analysis for goodwill and other indefinite-lived intangible assets,
income taxes, and contingencies and litigation. We base our estimates on historical experience and on
various other factors and assumptions that we believe to be reasonable under the circumstances, the
results of which form the bases for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
We believe the following accounting policies are most important to the portrayal of our financial
condition and results of operations and require our most significant judgments.
Revenue Recognition
We earn revenue by conducting meetings, selling products and aids in our meetings and to our
franchisees, collecting commissions from franchisees operating under the Weight Watchers name,
collecting royalties related to licensing agreements and selling advertising space in and copies of our
magazine. We charge non-refundable registration fees in exchange for an introductory information
session and materials we provide to new members. Revenue from these registration fees is recognized
when the service and products are provided, which is generally at the same time payment is received
from the customer. Revenue from meeting fees, product sales, commissions and royalties is recognized
when services are rendered, products are shipped to customers and title and risk of loss pass to the
customer, and commissions and royalties are earned. Advertising revenue is recognized when ads are
published. Revenue from magazine sales is recognized when the magazine is sent to the customer.
Deferred revenue, consisting of prepaid lecture and magazine subscription revenue, is amortized into
income over the period earned. Discounts to customers, including free registration offers, are recorded
as a deduction from gross revenue in the period such revenue was recognized. WeightWatchers.com
generates revenue from monthly subscriptions to its web site. Subscription fee revenues are recognized
over the period that products are provided. One time sign up fees are deferred and recognized over the
expected customer relationship period. Subscription fee revenues that are paid in advance are deferred
and recognized on a straight-line basis over the subscription period. We grant refunds under limited
circumstances and at aggregate amounts that historically have not been material. Because the period of
payment generally approximates the period revenue was originally recognized, refunds are recorded as
a reduction of revenue when paid.
Goodwill and Other Indefinite-lived Intangible Assets
Finite-lived intangible assets are being amortized using the straight-line method over their
estimated useful lives of three to 20 years. Effective December 30, 2001, we adopted SFAS No. 141,
‘‘Business Combinations’’ and SFAS No. 142, ‘‘Goodwill and Other Intangible Assets.’’ As a result, we
no longer amortize goodwill and other indefinite-lived intangible assets, but instead, review these assets
for potential impairment on at least an annual basis. We performed fair value impairment testing as of
January 1, 2005 and January 3, 2004 on our goodwill and other indefinite-lived intangible assets and
determined that the carrying amounts of these assets did not exceed their respective fair values and
therefore, no impairment existed. When determining fair value, we utilize various assumptions,
including projections of future cash flows. A change in these underlying assumptions will cause a
change in the results of the tests and, as such, could cause fair value to be less than the carrying
amounts. Upon such an event, we would be required to record a corresponding charge, which would
impact earnings. We continue to evaluate these estimates and assumptions and believe that these
assumptions, which included an estimate of future cash flows based upon the anticipated performance
of the underlying business units, were appropriate.
18
Hedging Instruments
We enter into forward and swap contracts to hedge transactions denominated in foreign currencies
in order to reduce currency risk associated with fluctuating exchange rates. These contracts have been
used primarily to hedge payments arising from some of our foreign currency denominated obligations.
In addition, we enter into interest rate swaps to hedge a substantial portion of our variable rate debt.
We account for our hedging instruments under the provisions of SFAS No. 133, ‘‘Accounting for
Derivative Instruments and Hedging Activities,’’ which requires that all derivative financial instruments
be recorded on the consolidated balance sheet at fair value as either assets or liabilities. Fair value
adjustments for qualifying derivative instruments are recorded as a component of other comprehensive
income and will be included in earnings in the periods in which earnings are affected by the hedged
item. Fair value adjustments for non-qualifying derivative instruments are recorded in our results of
operations.
Consolidation Under FIN 46R
On January 17, 2003, the Financial Accounting Standards Board (‘‘FASB’’) issued Interpretation
No. 46 (‘‘FIN 46’’), to clarify when an entity should consolidate another entity known as a variable
interest entity (‘‘VIE’’). The standard required that, under certain circumstances, separate businesses
with some common ownership be consolidated for financial reporting purposes. Upon adoption of the
original FIN 46, we did not meet those circumstances, and we therefore did not consolidate
WeightWatchers.com’s financial statements into our 2003 and prior reported financial statements.
On December 24, 2003, the FASB issued FIN 46R, which replaced FIN 46. FIN 46R is applicable
for financial statements issued for reporting periods after March 15, 2004. FIN 46R requires that an
entity consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the
VIE’s expected losses, will receive a majority of the VIE’s expected residual returns, or both.
Based on the revisions in FIN 46R, we were required to reevaluate our relationship with our
affiliate and licensee, WeightWatchers.com. In the course of this reevaluation, we determined that
WeightWatchers.com was a variable interest entity under FIN 46R and that we were its primary
beneficiary under this regulation. Effective April 3, 2004, we consolidated WeightWatchers.com. In
accordance with the provisions of FIN 46R, we recorded a charge of $11.9 million, including a tax
charge of $9.9 million, in the fiscal quarter ended April 3, 2004 for the cumulative effect of this
accounting change. This charge reflects the cumulative impact to our results of operations had
WeightWatchers.com been consolidated since its inception in September 1999. Beginning in our first
fiscal quarter ended April 3, 2004, our consolidated balance sheet includes the balance sheet of
WeightWatchers.com. Effective at the beginning of the second fiscal quarter of 2004, our consolidated
statement of operations and statement of cash flows include the results of WeightWatchers.com. All
intercompany balances have been eliminated in consolidation.
Income Taxes
Deferred income taxes result primarily from temporary differences between financial and tax
reporting. If it is more likely than not that some portion of a deferred tax asset will not be realized, a
valuation allowance is recognized. We consider historic levels of income, estimates of future taxable
income and feasible tax planning strategies in assessing the need for a tax valuation allowance. We also
establish an appropriate level of additional provisions for income taxes in the event that certain
positions, which we believe are fully supportable, are challenged by the tax authorities. We adjust these
additional provisions in light of changing facts and circumstances. If our filing positions are ultimately
upheld under audits by respective taxing authorities, the provision for income taxes in future years will
reflect favorable adjustments.
19
RESULTS OF OPERATIONS
Figures are rounded to the nearest one hundred thousand; percentage changes are based on
rounded figures. Attendance percentage changes are based on rounded figures to the nearest thousand.
Impact of FIN 46R
As a result of our adoption of FIN 46R, we began consolidating the results of our affiliate and
licensee, WeightWatchers.com, at the beginning of the second quarter 2004. The table below shows the
impact this adoption had on our consolidated income statement for the fiscal year ended January 1,
2005.
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
WWI
Results
$966.1
468.2
Impact of
Adopting
FIN 46R
$ 58.8
18.9
Consolidated
Results
$1,024.9
487.1
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
497.9
Marketing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income)/expense, net . . . . . . . . . . . . . . . . . . . . . . . . .
Early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . .
120.2
87.8
289.9
14.6
(9.3)
4.3
39.9
14.6
9.3
16.0
2.2
4.6
—
Income before taxes and cumulative effect of accounting
change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
280.3
9.2
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before cumulative effect of accounting change . . . .
Cumulative effect of accounting change . . . . . . . . . . . . . . . . .
101.1
179.2
—
(6.6)
15.8
(11.9)
537.8
134.8
97.1
305.9
16.8
(4.7)
4.3
289.5
94.5
195.0
(11.9)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$179.2
$ 3.9
$ 183.1
Weighted average diluted common shares outstanding . . . . . .
106.9
106.9
106.9
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.68
$ 0.03
$
1.71
Because the requirement to consolidate WeightWatchers.com’s income statement with ours began
in the second quarter 2004, the impact on the year ended January 1, 2005 includes
WeightWatchers.com’s results of operations, net of intercompany eliminations, for only the nine months
ended January 1, 2005.
The impact of the consolidation on the year ended January 1, 2005 is to add $58.8 million in
revenues and $39.9 million of gross profit. Operating income for the year increases by $16.0 million
after incremental marketing expenses of $14.6 million and selling, general and administrative expenses
of $9.3 million. A scheduled loan repayment of $4.9 million and interest income of $2.2 million, which
Weight Watchers International earned from WeightWatchers.com, is eliminated in the consolidation of
intercompany activity.
20
In accordance with the provisions of FIN 46R, we recorded a charge of $11.9 million, including
taxes, in the first quarter of 2004. This charge reflects the cumulative impact to our results of
operations had WeightWatchers.com been consolidated since its inception in September 1999.
For the year ended January 1, 2005, the consolidation combined with the first quarter cumulative
effect of accounting change, including taxes, related to the adoption of FIN 46R, resulted in an
increase to diluted earnings per share of $0.03.
Weight Watchers International (excluding the impact of FIN 46R)
The remaining sections of this discussion will address only the results of Weight Watchers
International and its majority-owned subsidiaries and will exclude the impact of FIN 46R and the
consolidation of WeightWatchers.com.
The chart below compares Weight Watchers International’s fiscal 2004 results to the prior year
comparable periods:
WWI Results
January 1,
2005
January 3,
2004
December 28,
2002
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . . . .
$966.1
468.2
$943.9
440.4
Gross profit . . . . . . . . . . . . . . . . . . . . . . .
Marketing expenses . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses .
Operating income . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . .
Other (income)/expense, net
. . . . . . . . . . . .
Early extinguishment of debt . . . . . . . . . . . .
Income before taxes . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . .
497.9
120.2
87.8
289.9
14.6
(9.3)
4.3
280.3
101.1
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
$179.2
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.68
503.5
113.6
73.8
316.1
33.7
2.8
47.4
232.2
88.3
$143.9
$ 1.31
$809.6
370.3
439.3
81.2
61.3
296.8
42.3
19.0
—
235.5
91.8
$143.7
$ 1.31
FY 2004
Inc/(Dec)
FY 2003
$ 22.2
27.8
FY 2003
Inc/(Dec)
FY 2002
$134.3
70.1
(5.6)
6.6
14.0
(26.2)
(19.1)
(12.1)
(43.1)
48.1
12.8
64.2
32.4
12.5
19.3
(8.6)
(16.2)
47.4
(3.3)
(3.5)
$ 35.3
$ 0.37
$
0.2
$ —
Comparison of the fiscal year ended January 1, 2005 (52 weeks) to the fiscal year ended January 3, 2004
(53 weeks)
Net income for the 2004 fiscal year was $179.2 million, up from $143.9 million in the prior year.
Diluted earnings per share were $1.68 in 2004 as compared to $1.31 in the prior year. Excluding the
impact of the early extinguishment of debt in both years, diluted earnings per share were $1.70 in 2004
compared to $1.59 in 2003. The 2003 fiscal year included a 53rd week versus only 52 weeks in the 2004
fiscal year. Accordingly, our reported results are not fully comparable for the two years.
Net revenues were $966.1 million for the fiscal year ended January 1, 2005, an increase of
$22.2 million, or 2.4%, from $943.9 million for the fiscal year ended January 3, 2004. The 2.4%
increase in net revenues was driven by international attendance growth and more favorable foreign
currency rates, partially offset by a decline in North America attendance. On a worldwide basis,
company-owned attendance declined 1.5%. Compared to the prior year, classroom meeting fees
increased $21.9 million, licensing revenues rose $7.0 million, advertising revenue increased $2.4 million,
and we earned an additional $1.1 million of royalties from our licensee, WeightWatchers.com. Franchise
21
commissions were $6.1 million lower than last year as we have continued our franchise acquisition
program, adding two more in 2004. Product sales declined $2.2 million, as did publishing and other
revenue by $1.9 million. Included in the total $22.2 million increase in net revenues is a benefit of
approximately $42.5 million from foreign currency exchange rates. On a local currency basis, meeting
fees and product sales in our international operations increased 5.4%.
For the year ended January 1, 2005, total classroom meeting fees were $629.1 million, an increase
of $21.9 million, or 3.6%, from $607.2 million in the prior year. Attendances declined slightly to
59.9 million from 60.8 million in the prior year. In NACO, classroom meeting fees were $373.1 million
for the year ended January 1, 2005, down 4.9% from $392.4 million in the prior year. Including
acquisitions, NACO attendance for the year was 6.5% lower than the prior year period. NACO organic
attendance declined 12.1%. The organic attendance comparison excludes the additional week in the
2003 fiscal year and any franchises that were acquired during either year. We acquired four franchises
since the beginning of 2003: The WW Group at the beginning of the second quarter 2003, Dallas and
New Mexico during the fourth quarter 2003, the Washington D.C. area during the second quarter 2004
and Fort Worth during the third quarter 2004. The low-carb diet fad, which escalated over the course
of the 2003 fiscal year, and was extended during 2004 by food manufacturers’ heavily marketed
introductions of related food products, has had an impact on our North America business. We believe
that the appeal of these low-carb diets has peaked and the phenomenon is now in decline. The
introduction of our TurnAround program has contributed to the improving attendance trends we are
seeing. The declines in organic attendances versus prior year periods improved from minus 16.7% in
the second quarter to minus 13.9% in the third quarter and minus 8.7% in the fourth quarter.
International company-owned classroom meeting fees were $256.0 million for the year ended
January 1, 2005, an increase of $41.2 million, or 19.2%, from $214.8 million for the year ended
January 3, 2004. The growth in meeting fees was primarily driven by attendance increases in
Continental Europe of 11.4% coupled with the favorable impact of foreign currency exchange rates.
Product sales were $274.6 million for the year ended January 1, 2005, a decrease of $2.2 million
from $276.8 million for the year ended January 3, 2004. While total domestic product sales declined
$19.8 million to $138.4 million from $158.2 million in the prior year, primarily driven by the attendance
decline, internationally, product sales increased 14.8% to $136.2 million. International product sales
rose 2.7% on a local currency basis.
Franchise royalties were $12.5 million domestically and $6.3 million internationally. Total franchise
royalties of $18.8 million were down $6.1 million, or 24.5%, from $24.9 million in the full year 2003.
The decrease resulted from the impact of having acquired four franchises in the U.S. since 2003 and
from the general slowdown in the U.S. business. Excluding the recently acquired franchises, domestic
franchise royalties declined 17.1%, while international franchise royalties rose 1.0%.
Revenue from advertising, licensing and other sources was $43.6 million for the year ended
January 1, 2005, an increase of $8.6 million, or 24.6%, from $35.0 million for the year ended January 3,
2004. Licensing revenue increased $7.0 million, up 72.2% over last year, due to our continued focus on
introducing a range of Weight Watchers branded products worldwide. Revenues from advertising, our
WeightWatchers.com licensee and other sources contributed to the remainder of the increase.
Cost of revenues was $468.2 million for the year ended January 1, 2005, an increase of
$27.8 million, or 6.3%, from $440.4 million for the year ended January 3, 2004. For the year ended
January 1, 2005, the gross profit margin of 51.5% remained above the 50% level, but was lower than
the 53.3% level of the prior year. We made the strategic decision to keep the vast majority of our
NACO meetings open, despite the negative impact on our gross margin resulting from lower
attendances per meeting, due to our expectation of the decline in the low-carb phenomenon. It is our
belief that this expectation is proving to be correct.
22
Marketing expenses increased $6.6 million, or 5.8%, to $120.2 million for the year ended
January 1, 2005 from $113.6 million in the year ended January 3, 2004, with the majority of the
increase resulting from currency translation. As a percentage of net revenue, marketing expenses were
12.4% for the year, as compared to 12.0% in the prior year period, driven by the softness in revenues.
Selling, general and administrative expenses were $87.8 million for the year ended January 1, 2005,
an increase of $14.0 million, or 19.0%, from $73.8 million in the prior year. Expenses were driven up
by professional fees and expenses related to compliance with Sarbanes-Oxley, as well as by a
strengthening of our management team and increase in our headcount to drive the future growth of
our business. Selling, general and administrative expenses were 9.1% of revenues for the year ended
January 1, 2005, as compared to 7.8% in the prior year.
Operating income was $289.9 million for the year ended January 1, 2005, a decrease of
$26.2 million, or 8.3%, from $316.1 million for the year ended January 3, 2004. Our operating income
margin for the year on this stand-alone basis was 30.0%, as compared to 33.5% in the prior year.
Net interest charges were down 56.7%, or $19.1 million, to $14.6 million for the year ended
January 1, 2005 from $33.7 million for the year ended January 3, 2004. The repurchase and retirement
in the third quarter of 2003 of most of our 13% Senior Subordinated Notes and the refinancing of our
Credit Facility at that time and again in January 2004 lowered our interest expense significantly.
For the year ended January 1, 2005, we reported other income of $9.3 million, as compared to
other expense of $2.8 million for the year ended January 3, 2004. In 2004, we received higher loan
repayments from WeightWatchers.com, which increased our other income by $4.8 million. In 2003, we
incurred unrealized currency translation gains and losses associated with our Senior Subordinated Notes
until the majority were retired in the third quarter of 2003. This has resulted in a $9.2 million decrease
in this expense.
We recognized early extinguishment of debt expenses of $4.3 million for the year ended January 1,
2005 as a result of the refinancing of our Credit Facility, which we undertook in the first quarter of
2004, and the repurchase and retirement of the balance of our Senior Subordinated Notes in the third
quarter of 2004. These expenses included the write off of unamortized debt issuance costs from prior
refinancings and the recognition of tender premiums and fees associated with these transactions. In the
third quarter of 2003, when we repurchased and retired the majority of our Senior Subordinated Notes,
we recognized early extinguishment of debt expenses of $47.4 million. These included tender premiums
of $42.6 million, the write off of unamortized debt issuance costs of $4.4 million and $0.4 million of
fees associated with the transaction.
Our effective tax rate for the year ended January 1, 2005 was 36.1% as compared to 38.0% for the
year ended January 3, 2004. We recorded a tax benefit in the third quarter of 2004 by reversing a
$5.5 million accrued but no longer necessary tax liability recorded as a result of the September 1999
recapitalization and stock purchase transaction with our former parent, H.J. Heinz Company.
Comparison of the fiscal year ended January 3, 2004 (53 weeks) to the fiscal year ended December 28, 2002
(52 weeks).
Net revenues were $943.9 million for the fiscal year ended January 3, 2004, an increase of
$134.3 million, or 16.6%, from $809.6 million for the fiscal year ended December 28, 2002. The 16.6%
increase in net revenues was partially the result of worldwide attendance growth of 10.1%, which drove
an $86.5 million increase in classroom meeting fees. The other components of the $134.3 million
increase in net revenues in fiscal 2003 over fiscal 2002 were $39.2 million of product sales, $2.9 million
of royalties from our licensee, WeightWatchers.com, $12.2 million attributable to our publications and
other licensing sources, offset by a $6.5 million decrease in franchise revenues. Excluding the impact of
fluctuations in foreign currency translations, meeting fees and product sales increased 10.7% in North
23
America and 11.2% internationally. The impact of currency fluctuations on worldwide revenues was an
increase of 5.5%.
Classroom meeting fees were $607.2 million for the fiscal year ended January 3, 2004 as compared
to $520.7 million for the fiscal year ended December 28, 2002, an increase of 16.6%. In NACO,
classroom meeting fees rose 11.9%, or $41.7 million, from $350.7 million in fiscal 2002 to
$392.4 million in fiscal 2003. Total attendances grew 12.4%. Excluding the impact of the two franchise
acquisitions completed during 2003 and the impact of the additional week in the 2003 fiscal year,
NACO’s organic attendances decreased 2.1% from the prior year. In the first half of the year,
attendance was negatively affected by bad winter weather, the war in Iraq, a late Easter and the
nine-month delay (until fall) of the NACO innovation. Escalating over the course of the year, the
low-carb diet phenomenon had a negative impact on the growth in our North American business. We
saw organic attendance declines versus prior year periods of 6.3% in the second quarter, 2.4% in the
third quarter and 3.1% in the fourth quarter.
International company-owned classroom meeting fees were $214.8 million for the fiscal year ended
January 3, 2004, an increase of $44.8 million, or 26.4%, from $170.0 million for the fiscal year ended
December 28, 2002. The 26.4% growth in meeting fees was driven by attendance increases of 8.2% in
the UK and 9.1% in Continental Europe, coupled with a 16.4% favorable impact from foreign currency
exchange rates.
Product sales were $276.8 million for the fiscal year ended January 3, 2004, an increase of
$39.2 million, or 16.5%, from $237.6 million for the fiscal year ended December 28, 2002. Product sales
increased 7.8% to $158.2 million domestically and 30.6% to $118.6 million internationally. The increase
in international product sales was fueled by attendance growth, higher sales per individual attendance
and the favorable impact of foreign currency fluctuations. The increase in domestic product sales
resulted from additional attendances and a price increase taken early in 2003 on certain of our
consumable products in some of our NACO markets. Product sales per attendance without the impact
of the WW Group acquisition decreased 12.3% in the fourth quarter of fiscal 2003 as compared to the
same quarter last year, but increased 3.8% for the full year as compared to 2002.
For the fiscal year ended January 3, 2004, franchise royalties were $18.6 million domestically and
$6.3 million internationally. In total, franchise royalties were $24.9 million in fiscal 2003, a decrease of
$6.4 million, or 20.4%, from $31.3 million for the fiscal year ended December 28, 2002. The decline
was mainly the result of our acquisition of certain franchise territories in 2003. As we continue to
acquire franchises, revenue from the associated commissions will continue to decline, but the overall
net impact on the business of making franchise acquisitions is accretive.
Revenues from publications, licensing and other royalties increased 75.0%, or $15.0 million, to
$35.0 million for the fiscal year ended January 3, 2004 from $20.0 million for the fiscal year ended
December 28, 2002. The main components of this gain were an $8.0 million rise in magazine
advertising revenues and publishing royalties, a $4.2 million increase in licensing revenue and
$2.9 million higher royalties earned from our WeightWatchers.com license.
Cost of revenues was $440.4 million for the fiscal year ended January 3, 2004, an increase of
$70.1 million, or 18.9%, from $370.3 million for the fiscal year ended December 28, 2002, outpacing
the 16.6% revenue growth for fiscal 2003. The resultant gross profit margin was 53.3% of sales in fiscal
2003, which was a one percentage point decrease from the 54.3% level of fiscal 2002.
24
The following chart shows the change in gross profit margin for each quarter of the last two fiscal
years:
Fiscal Year 2003
First
Fourth
Quarter Quarter Quarter Quarter
Second
Third
Full
Year
Revenues, net . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . .
$251.5
113.3
$258.8
116.1
$217.5
107.3
$216.1
103.7
$943.9
440.4
Gross profit ($) . . . . . . . . . . . . . . . . . .
$138.2
$142.7
$110.2
$112.4
$503.5
Gross profit (%) . . . . . . . . . . . . . . . . .
55.0% 55.1% 50.7% 52.0% 53.3%
Fiscal Year 2002
First
Fourth
Quarter Quarter Quarter Quarter
Second
Third
Full
Year
Revenues, net . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . .
$212.5
96.0
$217.9
96.0
$189.2
85.6
$190.1
92.6
$809.7
370.2
Gross profit ($) . . . . . . . . . . . . . . . . . .
$116.5
$121.9
$103.6
$ 97.5
$439.5
Gross profit (%) . . . . . . . . . . . . . . . . .
54.8% 55.9% 54.8% 51.3% 54.3%
Gross profit for fiscal 2003 was $503.5 million, up 14.6% from $439.3 million in fiscal 2002. The
change in the gross profit margin percentage for the full year 2003 as compared to 2002 resulted
primarily from factors relating to the timing of our Fall 2003 NACO innovation. These included
significant expenses in the third quarter 2003 relating to the nationwide innovation training meetings
held with our meeting room staff, the write-off of some unused program material and the decision to
keep more meetings open than we normally would have during the lower attendance summer months
in anticipation of the expected increased volume due to the innovation.
Marketing expenses increased $32.4 million, or 39.9%, to $113.6 million in the fiscal year ended
January 3, 2004 from $81.2 million in the fiscal year ended December 28, 2002. During 2003, we made
the decision to increase marketing to support the continuing growth of the business while specifically
targeting some of our key markets. As a percentage of net revenues, marketing expenses increased
from 10.0% in 2002 to 12.0% in 2003.
Selling, general and administrative expenses were $73.8 million for the fiscal year ended January 3,
2004, an increase of $12.5 million, or 20.4%, from $61.3 million for the fiscal year ended December 28,
2002. The main drivers of this increase were the acquisition of WW Group franchise territories, higher
medical and other insurance rates and legal fees, and expenses associated with additional regulatory
and compliance requirements. The impact of the dollar weakening relative to the currencies of our
international subsidiaries also had the result of increasing selling, general and administrative expenses.
As a percentage of revenue, selling, general and administrative expenses remained fairly consistent at
7.8% as compared to 7.6% last year.
Operating income was $316.1 million for the fiscal year ended January 3, 2004, an increase of
$19.3 million, or 6.5%, from $296.8 million for the fiscal year ended December 28, 2002. Operating
income growth lagged top line revenue growth primarily due to our decision to implement major
increases in marketing spending. Accordingly, our operating income margin fell in fiscal 2003 to 33.5%,
from 36.7% in the prior year. The decline in gross margin from the prior year also contributed to the
operating margin compression.
Net interest charges in 2003 were down 20.3% from $42.3 million in 2002 to $33.7 million. The
repurchase and retirement in the third quarter of 2003 of most of our 13% Senior Subordinated Notes
25
and the associated refinancing of our debt, (which will be explained in more detail below) lowered our
interest expense for the remainder of 2003 and beyond.
Other expenses, net were $2.8 million for the fiscal year ended January 3, 2004 as compared to
$19.0 million for the fiscal year ended December 28, 2002. Primarily as a result of the aforementioned
retirement of the euro denominated portion of our 13% Senior Subordinated Notes, we saw a
reduction in unrealized currency gains/losses net of hedges from a loss of $17.1 million in 2002 to a loss
of $9.1 million in 2003. Additionally, in 2003 we received a $5.0 million loan repayment from our
licensee, WeightWatchers.com, which we recorded as a component of other income in 2003 since the
loan balance had been entirely written off by the end of fiscal 2001.
As was mentioned above, in the third quarter of 2003, we successfully completed a tender offer
and consent solicitation to purchase 96.6% of our $150.0 million USD denominated ($144.9 million)
and 91.6% of our A100.0 million euro denominated (A91.6 million) 13% Senior Subordinated Notes.
The consideration for the tender offer and consent solicitation was funded from cash on hand and
additional borrowings under our Credit Facility, which was refinanced concurrently. We recognized
expense for early extinguishment of debt of $47.4 million in the third quarter of 2003 that included
tender premiums of $42.6 million, the write-off of unamortized debt issuance costs of $4.4 million and
$0.4 million of fees associated with the transaction. The average interest rate on our debt declined from
9.1% at December 28, 2002 to approximately 3.7% at January 3, 2004 as a result of the refinancing.
Our effective tax rate for the year ended January 3, 2004 was 38.0% as compared to 39.0% for the
year ended December 28, 2002. The early extinguishment of debt in the third quarter of 2003 caused a
change in the mix of domestic and foreign earnings, resulting in a reduction to the effective tax rate in
the year ended January 3, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Impact of FIN 46R
The Balance Sheet and Cash Flow tables below remove the impact of FIN 46R from our 2004
consolidated balances, and compare the stand-alone balances of Weight Watchers International for 2004
with those of the prior year.
26
Consolidated
Results
January 1,
2005
Less
Impact of
FIN 46R
WWI Stand Alone
(excluding impact of FIN 46R in 2004)
January 1, 2005
January 3, 2004
Inc/(Dec)
BALANCE SHEET
Cash and cash equivalents . . . . . . . . . .
Receivables, net . . . . . . . . . . . . . . . . .
Inventory and prepaid expenses . . . . . .
Total current assets . . . . . . . . . . . . .
Property and equipment, net . . . . . . . .
Goodwill, franchise rights and other
intangible assets, net . . . . . . . . . . . .
Deferred income taxes/other . . . . . . . .
$ 35.2
21.8
68.8
125.8
17.5
588.0
84.9
$16.5
(0.5)
5.0
21.0
2.5
3.2
(6.7)
Total assets . . . . . . . . . . . . . . . . . . .
$816.2
$20.0
Accounts payable and accrued
liabilities
. . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . .
Long term debt . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . .
Total liabilities and shareholders’
122.6
27.1
3.0
466.1
1.0
619.8
196.4
9.5
6.7
—
—
0.3
16.5
3.5
$ 18.7
22.3
63.8
104.8
15.0
584.8
91.6
$796.2
113.1
20.4
3.0
466.1
0.7
603.3
192.9
$ 23.4
18.5
72.9
114.8
15.7
522.6
117.6
$770.7
102.3
16.5
15.6
454.3
0.8
589.5
181.2
$ (4.7)
3.8
(9.1)
(10.0)
(0.7)
62.2
(26.0)
$ 25.5
10.8
3.9
(12.6)
11.8
(0.1)
13.8
11.7
equity . . . . . . . . . . . . . . . . . . . . .
$816.2
$20.0
$796.2
$770.7
$ 25.5
CASH FLOW
Cash provided by operating activities . .
Cash used for investing activities . . . . .
Cash used for financing activities . . . . .
Effect of exchange rate changes on
Consolidated
Results
January 1,
2005
$ 252.4
(65.8)
(180.4)
Less
Impact of
FIN 46R
$18.4
(7.6)
—
WWI Stand Alone
(excluding impact of FIN 46R in 2004)
January 1, 2005
January 3, 2004
Inc/(Dec)
$ 234.0
(58.2)
(180.4)
$ 233.1
(211.6)
(59.5)
$
0.9
153.4
(120.9)
cash . . . . . . . . . . . . . . . . . . . . . . . .
(0.1)
Impact of consolidating
WeightWatchers.com . . . . . . . . . . . .
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . .
Cash/cash equivalents, beginning of
period . . . . . . . . . . . . . . . . . . . . . .
5.7
11.8
23.4
—
5.7
16.5
—
(0.1)
—
(4.7)
23.4
3.9
—
(4.0)
—
(34.1)
29.4
57.5
(34.1)
Cash/cash equivalents, end of period . .
$ 35.2
$16.5
$ 18.7
$ 23.4
$
(4.7)
Impact of FIN46R on Consolidated Balance Sheet and Cash Flow
Balance Sheet
On the consolidated balance sheet, $20.0 million of the $816.2 million of total assets at January 1,
2005 resulted from the adoption of FIN 46R. The addition of WeightWatchers.com’s cash of
$16.5 million, deferred tax assets of $4.7 million and other assets of $9.6 million is partially offset by a
decline in WWI’s deferred tax assets, as $7.7 million of deferred tax assets was eliminated as a result of
the requirement to reverse all intercompany transactions in consolidation. This tax asset was recorded
27
by Weight Watchers International as a result of the write-off of its $34.5 million loan to
WeightWatchers.com during the fiscal years 2000 and 2001, net of $14.8 million in subsequent
repayments of that loan received during fiscal years 2003 and 2004. The net receivables/payables impact
of all other intercompany eliminations is combined in the $0.5 million decline in receivables, net.
Of the $619.8 million of liabilities on the consolidated balance sheet, $16.5 million resulted from
the adoption of FIN 46R and are comprised mainly of the addition of WeightWatchers.com’s payables
and accrued liabilities of $9.5 million and deferred revenue of $6.7 million.
Shareholders’ equity increases by $3.5 million for the cumulative impact to equity of adopting
FIN 46R. This includes recording WeightWatchers.com’s retained deficit through the 2004 fiscal year as
well as adjustments to reinstate the remaining principal of the $34.5 million loan formerly written off
by Weight Watchers International and to reverse the resultant tax benefit that had been recorded.
Cash Flow
As noted above, the FIN 46R impact on cash was to add $16.5 million to the year ended
January 1, 2004. In the 2004 fiscal year, cash flows increased $10.8 million from the operations of
WeightWatchers.com, net of intercompany eliminations and investing activities. In addition, in the first
quarter of 2004, as is required by this pronouncement, we recorded a $5.7 million net increase in cash
as a result of the impact of consolidating WeightWatchers.com.
The remainder of this section will address the financial position of Weight Watchers International
on a stand-alone basis, excluding the impact of FIN 46R.
Weight Watchers International (excluding the impact of FIN 46R)
Sources and Uses of Cash
For the year ended January 1, 2005, cash and cash equivalents were $18.7 million, a decrease of
$4.7 million from January 3, 2004. Cash flows provided by operating activities in the twelve months of
2004 were $234.0 million and funds used for investing and financing activities totaled $238.6 million.
Investing activities utilized $58.2 million of cash, which included the acquisitions of our Fort Worth and
Washington D.C. area franchises for $60.5 million. Cash used for financing activities totaled
$180.4 million primarily related to the repurchase of 4.7 million shares of our common stock for
$177.1 million, consistent with our stock repurchase program (see Part II, Item 5).
For the fiscal year ended January 3, 2004, cash and cash equivalents decreased $34.1 million to
$23.4 million. Cash flows provided by operating activities were $233.1 million. Funds used for investing
and financing activities during the fiscal year totaled $271.1 million. Investing activities in the year used
$211.6 million of cash and included $208.8 million paid in connection with the acquisition of the assets
of our WW Group and Dallas/New Mexico franchises. In addition, $5.0 million was invested in capital
expenditures. Cash used for financing activities totaled $59.5 million. We paid $60.3 million in
connection with the tender offer and repurchase of our 13% Senior Subordinated Notes and the
concurrent refinancing of our Credit Facility and repurchased $28.8 million of stock in accordance with
our stock repurchase program that began in October 2003. These were partially offset by net proceeds
of $26.6 million from additional debt borrowings arising at the time of the WW Group acquisition at
the end of March 2003.
For the fiscal year ended December 28, 2002, cash and cash equivalents increased $34.2 million to
$57.5 million and cash flows provided by operating activities were $164.9 million. Funds were used primarily
for investing and financing activities. Cash flows used for investing activities totaled $73.9 million and were
primarily attributable to $68.1 million paid in connection with the acquisition of the assets of our North
Jersey, San Diego and Eastern North Carolina franchises, and capital expenditures of $4.9 million. Net cash
flows used for financing activities were $60.5 million, including debt repayments of $35.3 million on our
28
Credit Facility, the repurchase of all $25.0 million of our outstanding preferred stock and the $1.2 million
cumulative final dividend payment on our preferred stock.
Balance Sheet
On the balance sheet, our cash balance of $18.7 million is $4.7 million lower than at January 3,
2004. Our working capital deficit at January 1, 2005 was $31.7 million compared to $19.6 million at
January 3, 2004. The $12.1 million increase in the working capital deficit was primarily attributable to a
$10.1 million increase in income taxes payable caused by the timing of tax payments, the $4.6 million
increase in current deferred tax liabilities primarily due to loan repayments from WeightWatchers.com,
a $6.2 million decrease in inventory resulting from our efforts to more efficiently manage inventory
levels, the $4.7 million decrease in cash, partially offset by the $12.6 million reduction in the current
portion of our long-term debt resulting from the repurchase and retirement of our remaining Senior
Subordinated Notes.
Capital spending has averaged approximately $4.7 million annually over the last three years and
has consisted primarily of leasehold improvements, furniture and equipment for meeting locations and
information system expenditures.
Long-Term Debt
Our Credit Facility (as defined in Note 6 to the Consolidated Financial Statements), as amended,
consists of Term Loans and a revolving line of credit (the ‘‘Revolver’’). Our total debt outstanding was
similar year-over-year at $469.1 million and $469.9 million at January 1, 2005 and January 3, 2004,
respectively. In January 2004, we refinanced our Credit Facility, moving a large portion of our fixed
Term Loans to the Revolver. This has provided us with a greater degree of flexibility and the ability to
more efficiently manage cash. Under this refinancing, our Term Loans were reduced from
$454.2 million to $150.0 million and our Revolver capacity was increased from $45.0 million to
$350.0 million. To complete the refinancing, we drew down $310.0 million of the Revolver. In
October 2004, we increased our net borrowing capacity by adding an additional Term Loan to our
existing Credit Facility in the amount of $150.0 million, coterminous with the previously existing Credit
Facility. These funds were initially used to reduce borrowings under our Revolver, resulting in no
increase to our net borrowing. Additionally, in October 2004, we repurchased and retired the remaining
balance of our Senior Subordinated Notes. In connection with the refinancing and retirement of debt
described above, we incurred expenses of approximately $4.3 million in the year ended January 1, 2005.
At January 1, 2005, our debt consisted entirely of variable-rate instruments. At January 3, 2004 and
December 28, 2002, fixed-rate debt constituted approximately 3.3% and 56.0% of our total debt,
respectively. The average interest rate on our debt was approximately 4.1%, 3.7% and 9.1% at
January 1, 2005, January 3, 2004 and December 28, 2002, respectively.
The following schedule sets forth our long-term debt obligations (and interest rates) at January 1,
2005:
Long-Term Debt
As of January 1, 2005
Revolver due 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term Loan B due 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Term Loan B due 2010 . . . . . . . . . . . . . . . . . . . . . .
Balance
(in millions)
$171.0
148.5
149.6
Interest
Rate
4.03%
4.16%
3.77%
Total Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Current Portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
469.1
3.0
Total Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
$466.1
29
The Term Loan B and the Revolver bear interest at a rate equal to LIBOR plus 1.75% or, at our
option, the alternate base rate (as defined in the Credit Facility) plus 0.75%. The Additional Term
Loan B bears interest at a rate equal to LIBOR plus 1.50%, or, at our option, the alternative base rate
(as defined in the Credit Facility) plus 0.50%. In addition to paying interest on outstanding principal
under the Credit Facility, we are required to pay a commitment fee to the lenders under the Revolver
with respect to the unused commitments at a rate equal to 0.375% per year.
Our Credit Facility contains customary covenants, including covenants that in certain circumstances
restrict our ability to incur additional indebtedness, pay dividends on and redeem capital stock, make
other restricted payments, including investments, sell our assets and enter into consolidations, mergers
and transfers of all or substantially all of our assets. Our Credit Facility also requires us to maintain
specified financial ratios and satisfy financial condition tests. The Credit Facility contains customary
events of default. Upon occurrence of an event of default under the Credit Facility, the lenders may
cease making loans and declare amounts outstanding to be immediately due and payable.
On January 9, 2004, Standard & Poor’s confirmed its ‘‘BB’’ rating for our corporate credit and our
Credit Facility. On March 11, 2005, Moody’s assigned a ‘‘Ba1’’ rating for our Term Loan B and
Additional Term Loan B and confirmed its ‘‘Ba1’’ rating for the Credit Facility.
Contractual Obligations
We are obligated under non-cancelable operating leases primarily for office and rent facilities.
Consolidated rent expense charged to operations under all our leases for the fiscal year ended
January 1, 2005 was approximately $27.2 million.
The impact that our contractual obligations as of January 1, 2005 are expected to have on our
consolidated liquidity and cash flow in future periods is as follows:
Total
Less than
1 Year
Long-Term Debt(1) . . . . . . . . . . .
Operating Leases . . . . . . . . . . . . .
$469.1
97.9
Total . . . . . . . . . . . . . . . . . . . .
$567.0
$ 3.0
25.8
$28.8
Payment Due by Period
1-3 Years
3-5 Years
(in millions)
$ 6.0
35.1
$41.1
$388.8
13.5
$402.3
More than
5 Years
$71.3
23.5
$94.8
(1) Due to the fact that all of our debt is variable rate based and that a significant portion of our debt
is under a revolving line of credit, the amount of future interest payments could not be reasonably
estimated and is therefore not included in the amounts shown. See above for a description of our
interest rates.
Debt obligations due to be repaid in the 12 months following January 1, 2005 are expected to be
satisfied with operating cash flows. We believe that cash flows from operating activities, together with
borrowings available under our Revolver, will be sufficient for the next 12 months to fund currently
anticipated capital expenditure requirements, debt service requirements and working capital
requirements.
Acquisitions
On May 9, 2004, we completed the acquisition of certain assets of our Washington, D.C. area
franchise for a purchase price of $30.5 million that was financed through cash from operations.
On August 22, 2004, we completed the acquisition of certain assets of our Fort Worth franchise for
a purchase price of $30.0 million that was financed through cash from operations.
30
On March 30, 2003, we completed the acquisition of certain assets of eight of the 15 franchises of
the WW Group for a purchase price of $180.7 million. The acquisition was financed through cash and
additional borrowings of $85.0 million.
On November 30, 2003, we completed the acquisition of certain assets of our Dallas and New
Mexico franchises for a purchase price of $27.2 million. The acquisition was financed through cash
from operations.
On January 18, 2002, we completed the acquisition of certain assets of our North Jersey franchise
for a purchase price of $46.5 million. The acquisition was financed through additional borrowings under
our Credit Facility, which were subsequently repaid by the end of the second quarter of 2002.
On July 2, 2002, we completed the acquisition of certain assets of our San Diego franchise for a
purchase price of $11.0 million. The acquisition was financed through cash from operations.
On September 1, 2002, we completed the acquisition of certain assets of our eastern North
Carolina franchise for a purchase price of $10.6 million. The acquisition was financed through cash
from operations.
Stock Transactions
On October 9, 2003, our Board of Directors authorized a program to repurchase up to
$250.0 million of our outstanding stock. The repurchase program allows for shares to be purchased
from time to time in the open market or through privately negotiated transactions. No shares will be
purchased from Artal Luxembourg or its affiliates under the program. During the fiscal year 2003, we
purchased 0.8 million shares of common stock in the open market for a total purchase price of
$28.8 million. During fiscal year 2004, we purchased 4.7 million shares of common stock in the open
market for a total purchase price of $177.1 million.
Factors Affecting Future Liquidity
Any future acquisitions, joint ventures or other similar transactions could require additional capital
and we cannot be certain that any additional capital will be available on acceptable terms or at all. Our
ability to fund our capital expenditure requirements, interest, principal and dividend payment
obligations and working capital requirements and to comply with all of the financial covenants under
our debt agreements depends on our future operations, performance and cash flow. These are subject
to prevailing economic conditions and to financial, business and other factors, some of which are
beyond our control.
OFF-BALANCE SHEET TRANSACTIONS
As part of our ongoing business, we do not participate in transactions that generate relationships
with unconsolidated entities or financial partnerships established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes, such as entities often
referred to as structured finance or special purpose entities.
SEASONALITY
Our business is seasonal, with revenues generally decreasing at year end and during the summer
months. Our advertising schedule supports the three key enrollment-generating seasons of the year:
winter, spring and fall, with winter having the highest concentration of advertising spending. Our
operating income for the first half of the year is generally the strongest.
WEIGHTWATCHERS.COM
Our affiliate and licensee, WeightWatchers.com, has the exclusive right to operate the Weight
Watchers web site and markets two online paid subscription products, Weight Watchers Online and
31
Weight Watchers eTools. WeightWatchers.com currently operates in the U.S., U.K., Canada and
Germany. We expect WeightWatchers.com will introduce new products and software and expand into
additional European markets in the future.
Based on trends in our business and in the weight-loss industry, WeightWatchers.com’s seasonality
is similar to that of Weight Watchers International. However, whereas WeightWatchers.com’s
subscriptions are similar, its revenue tends to appear less seasonal because they amortize subscription
revenue over the related subscription period.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board issued Statement No. 123R, ‘‘Share-
Based Payment’’ (‘‘FAS 123R’’), which replaces FAS 123, ‘‘Accounting for Stock-Based Compensation’’
and supercedes Accounting Principles Board Opinion 25, ‘‘Accounting for Stock Issued to Employees.’’
FAS 123R eliminates the option of using the intrinsic value method to record compensation expense
related to stock-based awards to employees and instead requires companies to recognize the cost of
such awards based on their grant-date fair value over the related service period of such awards. We will
adopt the provisions of this standard beginning in the third quarter of fiscal 2005.
We have elected to apply the modified prospective transition method to all past awards
outstanding and unvested as of the date of adoption and will recognize the associated expense over the
remaining vesting period based on the fair values previously determined and disclosed as part of our
pro-forma disclosures. We will not restate the results of prior periods. Prior to the effective date of
FAS 123R, we will continue to provide the pro forma disclosures for past award grants as required
under FAS 123. We believe the pro forma disclosures in Note 2 to our consolidated financial
statements provide an appropriate short-term indicator of the level of expense that will be recognized
in accordance with FAS 123R. However, the total expense recorded in future periods will depend on
several variables, including the number of share-based payment awards that are granted in future
periods and the fair value of those awards.
The American Jobs Creation Act of 2004 (the ‘‘AJCA’’) was enacted on October 22, 2004 and
includes a special one-time deduction of 85% of certain foreign earnings repatriated to the U.S. In
December 2004, the FASB issued FSP FAS 109-2, Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the AJCA, allowing companies additional time to evaluate the
effect of the AJCA on plans for reinvestment or repatriation of foreign earnings. We are in the process
of evaluating the effects of the repatriation provision; however, we do not expect to complete this
evaluation until after Congress or the U.S. Treasury Department provides further clarification on key
elements of the provision. As such, we have not concluded our analysis to determine whether, and to
what extent, we might repatriate foreign earnings. We expect to be in a position to finalize the
assessment within a reasonable amount of time after the issuance of clarifying U.S. Treasury or
Congressional guidance.
FORWARD-LOOKING STATEMENTS
Certain statements in this Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition
and Results of Operations,’’ contain not only historical information, but also forward-looking statements
regarding expectations for our future performance. Forward-looking statements involve risk and
uncertainty. Please see ‘‘Cautionary Notice Regarding Forward-Looking Statements’’ on page 10 for a
discussion of factors that could cause our future results to differ from current expectations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to foreign currency fluctuations and interest rate changes. Our exposure to market
risk for changes in interest rates relates to interest expense of variable rate debt.
32
Due to the repurchase and retirement of the remaining balance of our Senior Subordinated Notes,
we no longer have any fixed rate borrowings outstanding at January 1, 2005. Therefore, market interest
rates no longer affect the fair value of our long-term debt balances. Since 100% of our debt is now
variable rate based, any changes in market interest rates will cause an equal change in our net interest
expense.
Other than inter-company transactions between our domestic and foreign entities, we generally do
not have significant transactions that are denominated in a currency other than the functional currency
applicable to each entity.
We enter into forward and swap contracts to hedge transactions denominated in foreign currencies
to reduce the currency risk associated with fluctuating exchange rates. These contracts are used
primarily to hedge payments arising from some of our foreign currency denominated obligations.
Realized and unrealized gains and losses from these transactions are included in net income for the
period. In addition, we enter into interest rate swaps to hedge a substantial portion of our variable rate
debt. Changes in the fair value of these derivatives will be recorded each period in earnings for
non-qualifying derivatives or accumulated other comprehensive income (loss) for qualifying derivatives.
Fluctuations in currency exchange rates may also impact our shareholders’ equity. The assets and
liabilities of our non-U.S. subsidiaries are translated into U.S. dollars at the exchange rates in effect at
the balance sheet date. Revenues and expenses are translated into U.S. dollars at the weighted average
exchange rate for the period. The resulting translation adjustments are recorded in shareholders’ equity
as accumulated other comprehensive income (loss). In addition, fluctuations in the value of the euro
will cause the U.S. dollar translated amounts to change in comparison to prior periods.
Each of our subsidiaries derives revenues and incurs expenses primarily within a single country
and, consequently, does not generally incur currency risks in connection with the conduct of normal
business operations.
Item 8. Financial Statements and Supplementary Data
This information is incorporated by reference to the ‘‘Consolidated Financial Statements and
Notes’’ on pages F-1 through F-34, together with the report thereon of PricewaterhouseCoopers LLP
on page F-35.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the
‘‘Exchange Act’’) is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission’s rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of January 1, 2005. Based upon that evaluation
and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that
the design and operation of our disclosure controls and procedures provided reasonable assurance that
the disclosure controls and procedures are effective to accomplish their objectives.
33
In addition, there was no change in our internal control over financial reporting that occurred
during the quarter ended January 1, 2005 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
The management of our Company is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial reporting is a process designed
under the supervision and with the participation of our management, including our principal executive
officer and principal financial officer, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America.
The Company’s management assessed the effectiveness of the Company’s internal control over
financial reporting as of January 1, 2005, the end of the Company’s 2004 fiscal year. In making this
assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based
on this assessment, management, under the supervision and with the participation of our principal
executive officer and principal financial officer, concluded that, as of January 1, 2005, the Company’s
internal control over financial reporting was effective based on those criteria.
Management has excluded WeightWatchers.com from its assessment of the effectiveness of internal
control over financial reporting as of January 1, 2005. WeightWatchers.com is a variable interest entity
required to be consolidated with Weight Watchers International, Inc. under the provisions of FASB
Interpretation No. 46R during 2004. Since it does not have the contractual right, authority or ability, in
practice, to assess the internal controls over financial reporting of WeightWatchers.com, nor does it
have the ability to dictate or modify those controls, management has concluded it is unable to assess
the effectiveness of the internal control over financial reporting of WeightWatchers.com. As of and for
the year ended January 1, 2005, Weight Watchers International, Inc.’s consolidated financial statements
include total assets and total revenues of 3.8% and 6.8%, respectively, related to WeightWatchers.com.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has
audited and issued their report on management’s assessment of the effectiveness of the Company’s
internal control over financial reporting, which appears on page F-35.
34
PART III
Item 10. Executive Officers and Directors of the Company
Set forth below are the names, ages as of January 1, 2005 and current positions with us and our
subsidiaries of our executive officers and directors. Directors are elected at the annual meeting of
shareholders. Executive officers are appointed by, and hold office at, the discretion of the directors.
Name
Linda Huett . . . . . . . . . . . . . . . . . . . . . . . . . .
Age
60
Position
President and Chief Executive Officer, Director
Ann M. Sardini
. . . . . . . . . . . . . . . . . . . . . . .
54 Chief Financial Officer
Thilo Semmelbauer
. . . . . . . . . . . . . . . . . . . .
39 Chief Operating Officer, NACO
Scott R. Penn(5) . . . . . . . . . . . . . . . . . . . . . . .
33 Vice President, Australasia
Robert W. Hollweg . . . . . . . . . . . . . . . . . . . . .
62 Vice President, General Counsel and Secretary
Melanie Stubbing . . . . . . . . . . . . . . . . . . . . . .
43 Vice President of Operations, United Kingdom
Raymond Debbane(1) . . . . . . . . . . . . . . . . . . .
49 Chairman of the Board
Philippe J. Amouyal(4) . . . . . . . . . . . . . . . . . .
46 Director
Jonas M. Fajgenbaum . . . . . . . . . . . . . . . . . . .
32 Director
Sacha Lainovic(1) . . . . . . . . . . . . . . . . . . . . . .
48 Director
Christopher J. Sobecki
. . . . . . . . . . . . . . . . . .
46 Director
Sam K. Reed(2)(3) . . . . . . . . . . . . . . . . . . . . .
57 Director
Marsha Johnson Evans(2)(3) . . . . . . . . . . . . . .
57 Director
John F. Bard(1)(2)(4) . . . . . . . . . . . . . . . . . . .
63 Director
(1) Member of our compensation and benefits committee.
(2) Member of our Audit Committee.
(3) Named to the Board of Directors on February 12, 2002.
(4) Named to the Board of Directors on November 13, 2002.
(5) Mr. Penn resigned as an executive officer effective March 18, 2005.
Linda Huett. Ms. Huett has been the President and a director of our company since
September 1999. She became our Chief Executive Officer in December 2000. Ms. Huett joined our
company in 1984 as a classroom leader. Ms. Huett was promoted to U.K. Training Manager in 1986. In
1990, Ms. Huett was appointed Director of the United Kingdom operation and in 1993 was appointed
Vice President of Weight Watchers U.K. Ms. Huett received a B.A. degree from Gustavas Adolphus
College and received her Masters in Theater from Yale University. Ms. Huett is also a director of
WeightWatchers.com, Inc.
Ann M. Sardini. Ms. Sardini has served as our Chief Financial Officer since April 2002 when she
joined our company. Ms. Sardini has over 20 years of experience in senior financial management
positions in branded media and consumer products companies. Prior to joining us, she served as Chief
Financial Officer of VitaminShoppe.com, Inc. from 1999 to 2001, and from 1995 to 1999 she served as
Executive Vice President and Chief Financial Officer for the Children’s Television Workshop. In
35
addition, Ms. Sardini has held finance positions at QVC, Chris Craft Industries and the National
Broadcasting Company. Ms. Sardini received a B.A. from Boston College and an M.B.A. from
Simmons College Graduate School of Management.
Thilo Semmelbauer. Mr. Semmelbauer has served as our Chief Operating Officer for North
America since March 29, 2004. He most recently served as the President and Chief Operating Officer
of WeightWatchers.com, the exclusive Internet licensee of Weight Watchers International, and the
online presence for the Weight Watchers brand. He held that position since February 2000 and during
that time, WeightWatchers.com grew from a start up to almost $80 million in annual revenues in 2003
and has become a leader in online weight loss. Prior to WeightWatchers.com, Mr. Semmelbauer was
with The Boston Consulting Group in the Consumer Goods, Technology and e-Commerce practices.
Previously, Mr. Semmelbauer was in Product Management at Motorola, Inc. He received his Master of
Science degree in Management and Engineering from the Massachusetts Institute of Technology and is
a graduate of Dartmouth College.
Scott R. Penn. Mr. Penn has been a Vice President of our Australasia operations since
September 1999. Mr. Penn joined our company in 1994 as a Marketing Services Manager in Australia.
In 1996, he was promoted to Group Marketing Manager in Australia and in 1997 he was promoted to
General Manager-Marketing and Finance.
Robert W. Hollweg. Mr. Hollweg has served as our Vice President, General Counsel and Secretary
since January 1998. He joined our company in 1969 as an Assistant Counsel in the law department. He
transferred to the Heinz law department subsequent to Heinz’ acquisition of our company in 1978 and
served there in various capacities. He rejoined us after Artal Luxembourg acquired our company in
September 1999. Mr. Hollweg graduated from Fordham University and received his Juris Doctor
degree from Fordham University School of Law. He is a member of the American and New York State
Bar Associations and a former President of the International Trademark Association.
Melanie Stubbing. Ms. Stubbing has served as our Vice President of Operations—United Kingdom
since November 2003. Ms. Stubbing has more than 16 years experience working with strong consumer
brands, including a position running the UK-based toy, game and trading card operations for
Hasbro, Inc., a position she held from January 2002 to November 2003. From November 2000 to
January 2002, Ms. Stubbing was the Vice President for WeightWatchers.com, Inc. Prior to joining
WeightWatchers.com, Ms. Stubbing was Managing Director, Hedstrom, U.K. from August 1998 to
October 2000, and from July 1989 to July 1998 she held various marketing positions at Mattel UK Ltd.,
including Group Marketing Director. Ms. Stubbing is a business graduate of Manchester Metropolitan
University.
Raymond Debbane. Mr. Debbane has been our Chairman of the Board of Directors since our
acquisition by Artal Luxembourg on September 29, 1999. Mr. Debbane is a co-founder and President
of The Invus Group, LLC. Prior to forming The Invus Group, LLC in 1985, Mr. Debbane was a
manager and consultant for The Boston Consulting Group in Paris, France. He holds an M.B.A. from
Stanford Graduate School of Business, an M.S. in Food Science and Technology from the University of
California, Davis and a B.S. in Agricultural Sciences and Agricultural Engineering from American
University of Beirut. Mr. Debbane is a director of Artal Group S.A., Ceres, Inc. and the Chairman of
the Board of Directors of Financial Technologies International, Inc. Mr. Debbane is also the Chairman
of the Board of Directors of WeightWatchers.com, Inc. and served as a director of Keebler Foods
Company from 1996 to 1999.
Philippe J. Amouyal. Mr. Amouyal was elected a director of our company in November 2002.
Mr. Amouyal is a Managing Director of The Invus Group, LLC, which he joined in 1999. Previously,
Mr. Amouyal was a Vice President and director of The Boston Consulting Group, Inc. in Boston, MA.
He holds an M.S. in engineering and a DEA in Management from Ecole Centrale de Paris and was a
36
Research Fellow at the Center for Policy Alternatives of the Massachusetts Institute of Technology.
Mr. Amouyal is a director of WeightWatchers.com, Inc., Financial Technologies International, Inc.,
Metamarix, Inc., Entopia, Inc. and Unwired Group Limited.
Jonas M. Fajgenbaum. Mr. Fajgenbaum has been a director of our company since our acquisition
by Artal Luxembourg on September 29, 1999. Mr. Fajgenbaum is a Managing Director of The Invus
Group, LLC, which he joined in 1996. Prior to joining The Invus Group, LLC, Mr. Fajgenbaum was a
consultant for McKinsey & Company in New York from 1994 to 1996. He graduated with a B.S. from
the Wharton School of Business and a B.A. in Economics from the University of Pennsylvania in 1994.
Sacha Lainovic. Mr. Lainovic has been a director of our company since our acquisition by Artal
Luxembourg on September 29, 1999. Mr. Lainovic is a co-founder and Executive Vice President of The
Invus Group, LLC. Prior to forming The Invus Group, LLC in 1985, Mr. Lainovic was a manager and
consultant for The Boston Consulting Group in Paris, France. He holds an M.B.A. from Stanford
Graduate School of Business and an M.S. in engineering from Insa de Lyon in Lyon, France.
Mr. Lainovic is a director of WeightWatchers.com, Inc., Financial Technologies International, Inc. and
Unwired Australia Pty Limited, and also served as a director of Keebler Foods Company from 1996 to
1999.
Christopher J. Sobecki. Mr. Sobecki has been a director of our company since our acquisition by
Artal Luxembourg on September 29, 1999. Mr. Sobecki, a Managing Director of The Invus Group,
LLC, joined the firm in 1989. He received an M.B.A. from Harvard Business School. He also obtained
a B.S. in Industrial Engineering from Purdue University. Mr. Sobecki is a director of
WeightWatchers.com, Inc., Financial Technologies International, Inc. and iLife, Inc. He also served as a
director of Keebler Foods Company from 1996 to 1998.
Sam K. Reed. Mr. Reed has been a director of our company since February 2002. Mr. Reed has
30 years of experience in the food industry. He is currently the CEO of Dean Specialty Foods
Holdings, Inc. Formerly, Mr. Reed was Vice Chairman and a director of Kellogg Company, the world’s
leading producer of cereal and a leading producer of convenience foods. From 1996 to 2001, Mr. Reed
was Chief Executive Officer, President and a director of Keebler Foods Company. Previously, he was
Chief Executive Officer of Specialty Foods Corporation’s Western Bakery Group division. He is a
director of the Tractor Supply Company. Mr. Reed received a B.A. from Rice University and an
M.B.A. from Stanford Graduate School of Business.
Marsha Johnson Evans. Ms. Evans has been a director of our company since February 2002.
Ms. Evans is currently President and Chief Executive Officer of the American Red Cross, the
preeminent humanitarian organization in the United States, and previously served as the National
Executive Director of Girl Scouts of the U.S.A. A retired Rear Admiral in the United States Navy,
Ms. Evans has served as superintendent of the Naval Postgraduate School in Monterey, California and
headed the Navy’s worldwide recruiting organization from 1993 to 1995. She is currently a director of
the May Department Stores Company, Lehman Brothers Holdings, Inc. and several nonprofit boards.
Ms. Evans received a B.A. from Occidental College and a Master’s Degree from the Fletcher School of
Law and Diplomacy at Tufts University.
John F. Bard. Mr. Bard has been a director since November 2002. Since 1999, he has been a
director of the Wm. Wrigley Jr. Company, where he served as Executive Vice President from 1999 to
2000, Senior Vice President from 1990-1999, and at the same time serving as Chief Financial Officer
from 1990 until his retirement from management in 2000. He began his business career in 1963 with
The Procter & Gamble Company in financial management. He subsequently was Group Vice President
and Chief Financial Officer and a director of The Clorox Company and later President and a director
of Tambrands, Inc., prior to joining Wrigley. Mr. Bard holds a B.S. in business from Northwestern
37
University and an M.B.A. in Finance from the University of Cincinnati. In addition to Wrigley, he also
serves as a director of Sea Pines Associates, Inc. and Rowpart Pharmaceuticals, Inc.
Board of Directors
Our Board of Directors is currently comprised of nine directors.
Classes and Terms of Directors
Our Board of Directors is divided into three classes, equal in number, with each director serving a
three-year term and one class being elected at each year’s annual meeting of shareholders. The
following individuals are directors and serve for the terms indicated:
Class 1 Directors (term expiring in 2005)
Raymond Debbane
John F. Bard
Jonas M. Fajgenbaum
Class 2 Directors (term expiring in 2006)
Marsha Johnson Evans
Sacha Lainovic
Christopher J. Sobecki
Class 3 Directors (term expiring in 2007)
Linda Huett
Philippe J. Amouyal
Sam K. Reed
Committees of the Board of Directors
The standing committees of our Board of Directors consist of an Audit Committee and a
Compensation and Benefits Committee.
Audit Committee
We have an Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange
Act, as amended. The members of the Audit Committee are Sam K. Reed, Marsha Johnson Evans and
John F. Bard.
The principal duties of our Audit Committee are as follows:
(cid:127) to oversee that our management has maintained the reliability and integrity of our accounting
policies and financial reporting and our disclosure practices;
(cid:127) to oversee that our management has established and maintained processes to ensure that an
adequate system of internal controls is functioning;
(cid:127) to oversee that our management has established and maintained processes to ensure our
compliance with all applicable laws, regulations and corporate policy;
(cid:127) to prepare an annual performance evaluation of the Audit Committee;
(cid:127) to establish and maintain procedures for the receipt, retention and treatment of complaints
received by us, from any source, regarding accounting, internal accounting controls or auditing
38
matters and from our employees for the confidential anonymous submission of concerns
regarding questionable accounting or auditing matters;
(cid:127) to assist the Board of Directors in its oversight of the integrity of our financial statements;
(cid:127) to review our annual and quarterly financial statements prior to their filing or prior to the
release of earnings;
(cid:127) to oversee the performance of the Company’s independent registered public accounting firm and
to retain or terminate the Company’s independent registered public accounting firm and approve
all audit and non-audit engagement fees and terms; and
(cid:127) to review at least annually, the qualifications, performance and independence of the Company’s
independent registered public accounting firm.
The Audit Committee has the power to investigate any matter brought to its attention within the
scope of its duties and to retain counsel for this purpose where appropriate.
Our Board of Directors has determined that each of the Audit Committee members, Sam K. Reed,
Marsha Johnson Evans and John F. Bard, is an ‘‘audit committee financial expert’’ as defined by Item
401(h) of Regulation S-K of the Exchange Act, has satisfied the financial literacy requirements of the
New York Stock Exchange and has no direct or indirect material relationship with the Company and
thus is independent under applicable listing standards of the New York Stock Exchange, Rule 10A-3
under the Exchange Act and our Corporate Governance Guidelines. The Audit Committee operates
under a written charter, which is available on the Company’s website at
www.weightwatchersinternational.com. In addition, shareholders may request a free copy of the Audit
Committee charter from: Weight Watchers International, Inc., Attn: Corporate Secretary, 175 Crossways
Park West, Woodbury, NY 11797, (516) 390-1400.
Compensation and Benefits Committee
The principal duties of the compensation and benefits committee are as follows:
(cid:127) to review key employee compensation policies, plans and programs;
(cid:127) to monitor performance and compensation of our employee-director, officers and other key
employees;
(cid:127) to prepare recommendations and periodic reports to the Board of Directors concerning these
matters; and
(cid:127) to function as the committee that administers the incentive programs referred to in ‘‘Executive
Compensation’’ below.
Due to the beneficial ownership by Artal Luxembourg and its affiliates of more than 50% of the
outstanding common stock of the Company, the Company is considered a ‘‘controlled company’’ as
defined in the listing standards of the New York Stock Exchange. As such, the Company is exempt
from the requirements to have nominating/corporate governance and compensation committees
composed entirely of independent directors and a majority of independent directors on its Board of
Directors.
Compensation and Benefits Committee Interlocks and Insider Participation
None of our executive officers has served as a director or member of the compensation and
benefits committee, or other committee serving an equivalent function, of any entity of which an
executive officer is expected to serve as a member of our Compensation and Benefits Committee.
39
Compensation and Benefits Committee Report on Executive Compensation Programs
Our Compensation and Benefits Committee oversees our compensation programs with particular
attention to the compensation of our Chief Executive Officer and other executive officers. It is the
responsibility of the Compensation and Benefits Committee to review, recommend and approve
changes to our compensation policies and benefits programs, to administer our stock plans, including
approving stock option grants to executive officers and other stock option grants, and to otherwise
ensure that our compensation philosophy is consistent with our best interests and is properly
implemented.
Our compensation philosophy is to (1) provide a competitive total compensation package that
enables us to attract and retain key executive and employee talent needed to accomplish our goals, and
(2) directly link compensation to improvements in our financial and operational performance.
Total compensation is comprised of a base salary plus both cash and non-cash incentive
compensation, and is based on our financial performance and other factors, and is delivered through a
combination of cash and equity-based awards. This approach results in overall compensation levels that
follow our financial performance.
Our Compensation and Benefits Committee reviews each senior executive officer’s base salary
annually. In determining appropriate base salary levels, consideration is given to the officer’s impact
level, scope of responsibility, prior experience, past accomplishments and data on prevailing
compensation levels in relevant executive labor markets.
Our Compensation and Benefits Committee believes that granting stock options provides officers
with a strong economic interest in maximizing shareholder returns over the longer term. We believe
that the practice of granting stock options is important in retaining and recruiting the key talent
necessary at all employee levels to ensure our continued success.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics for our officers, including our principal
executive officer, principal financial officer, principal accounting officer and controller, and our
employees and directors.
Shareholders may request a free copy of the Code of Business Conduct and Ethics from:
Weight Watchers International, Inc.
Attn: Corporate Secretary
175 Crossways Park West
Woodbury, NY 11797
(516) 390-1400
Any amendment of our Code of Business Conduct and Ethics or waiver thereof applicable to any
of our principal executive officer, principal financial officer, principal accounting officer or controller
will be disclosed on our website within 5 days of the date of such amendment or waiver. In the case of
a waiver, the nature of the waiver, the name of the person to whom the waiver was granted and the
date of the waiver will also be disclosed.
Corporate Governance Guidelines
The Company has adopted a Corporate Governance Guidelines for our officers, directors and
employees. Our Corporate Governance Guidelines are available on our website at
www.weightwatchersinternational.com. In addition, shareholders may request a free copy of our
Corporate Governance Guidelines from: Weight Watchers International, Inc., Attn: Corporate
Secretary, 175 Crossways Park West, Woodbury, NY 11797, (516) 390-1400.
40
NYSE and SEC Certifications
On June 10, 2004, we filed with the NYSE the Annual CEO Certification regarding the Company’s
compliance with the NYSE’s Corporate Governance listing standards as required by Section 303A.12(a)
of the NYSE Listed Company Manual. In addition, the Company has filed as exhibits to this annual
report, the applicable certifications of our Chief Executive Officer and our Chief Financial Officer
required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, regarding the quality of the
Company’s public disclosures.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive
officers and holders of more than 10% of our common stock (collectively, ‘‘Reporting Persons’’) to file
with the Securities and Exchange Commission initial reports of ownership and reports of changes in
ownership of our common stock. Such persons are required by regulations of the Securities and
Exchange Commission to furnish us with copies of all such filings. Based on our review of the copies of
such filings received by us with respect to the fiscal year ended January 1, 2005 and written
representations from certain Reporting Persons, we believe that all Reporting Persons complied with all
Section 16(a) filing requirements in the fiscal year ended January 1, 2005.
41
Item 11. Executive Compensation
The following table sets forth for the fiscal years ended January 1, 2005, January 3, 2004 and
December 28, 2002 the compensation paid to our President and Chief Executive Officer and to each of
the next four most highly compensated executive officers whose total annual salary and bonus was in
excess of $100,000.
Summary Compensation Table
Name and principal position
Twelve Months
Ended
Salary
Long-Term
Compensation
Awards(6)
Twelve Month
Period
Compensation
Restricted Securities
Underlying
Bonus Awards($) Options(#) Compensation(5)
All Other
Stock
Linda Huett . . . . . . . . . . . . . . . . . . . .
President and
Chief Executive Officer
$510,227
—
January 1, 2005
January 3, 2004
$301,868 $197,000
December 28, 2002 $281,076 $399,421
Ann M. Sardini(1) . . . . . . . . . . . . . . . .
Chief Financial Officer
January 1, 2005
$304,219 $ 49,148
$245,662 $161,000
January 3, 2004
December 28, 2002 $155,488 $152,932
Thilo Semmelbauer(2) . . . . . . . . . . . . .
Chief Operating Officer,
NACO
January 1, 2005
January 3, 2004
December 28, 2002
$202,902 $128,255
—
—
—
—
— 160,000
40,000
—
—
—
—
20,000
20,000
—
— 100,000
— 100,000
—
—
—
—
Melanie Stubbing(3) . . . . . . . . . . . . . . .
Vice President of Operations,
United Kingdom
January 1, 2005
January 3, 2004
December 28, 2002
$238,486 $119,243
$ 19,024
—
—
— $108,030
—
—
Maurice Kelly(4) . . . . . . . . . . . . . . . . .
Vice President of Strategy and Operations,
Continental Europe
January 1, 2005
January 3, 2004
December 28, 2002
$238,486 $119,423
—
$ 41,637
—
—
—
—
—
10,000
47,000
—
10,000
50,000
—
$57,476
$65,509
$55,907
$47,936
$44,844
$59,215
$18,315
—
—
$40,286
$ 3,213
—
$18,822
$ 3,286
—
(1) Ms. Sardini joined us on April 25, 2002 and therefore her compensation for 2002 only includes approximately eight months.
(2) Mr. Semmelbauer joined us on March 29, 2004, and therefore his compensation for 2004 only includes approximately nine
months.
(3) Ms. Stubbing joined us on December 1, 2003, and therefore her compensation for 2003 only includes approximately one
month.
(4) Mr. Kelly joined us on October 27, 2003, and therefore his compensation for 2003 includes only approximately two months.
Mr. Kelly resigned as an executive officer effective January 31, 2005.
(5) For the fiscal year ended January 1, 2005, these figures include amounts contributed under our 401(k) savings plan and our
non-qualified executive profit sharing plan of $48,824 for Ms. Huett, $31,746 for Ms. Sardini, and $9,515 for
Mr. Semmelbauer. Also included are contributions to the U.K. Pension Plan of $21,464 for Ms. Stubbing and $0 for
Mr. Kelly, as well as auto lease expense for named executives.
(6) The securities underlying all restricted stock and option awards are shares of Weight Watchers International common stock.
In May 2004 and December 1999, respectively, our stockholders approved our 2004 Stock Incentive
Plan (the ‘‘2004 Plan’’) and our 1999 Stock Purchase and Option Plan (the ‘‘1999 Plan’’) under which
selected employees are afforded the opportunity to purchase shares of our common stock and/or were
granted options to purchase shares of our common stock. The number of shares available for grant
under the 2004 Plan and the 1999 Plan is 2,500,000 shares and 7,058,040 shares, respectively, of our
authorized common stock.
42
The following table sets forth information regarding options granted during the fiscal year ended
January 1, 2005 to the named executive officers under our stock purchase and option plan.
Weight Watchers International Option Grants
For the Fiscal Year Ended January 1, 2005
Individual Grants
Number of
Securities
Underlying
Options
Granted(1)
40,000
120,000
20,000
100,000
10,000
10,000
Percent of
Total Options
Granted to
Employees in
Fiscal Year Ended
January 1,
2005(2)
4.7%
14.0%
2.3%
11.7%
1.2%
1.2%
Exercise
or
Base Price
(per share)
Expiration
Date
$38.64
January 4, 2009
$38.52 March 10, 2009
$38.64
January 4, 2009
$36.71 May 12, 2014
$38.64
$38.64
January 4, 2009
January 4, 2009
Grant
Date
Present
Value(3)
$ 543,024
$1,568,136
$ 271,512
$1,626,980
$ 135,756
$ 135,756
Name
. . . . . . . . . . . . . .
Linda Huett
Linda Huett
. . . . . . . . . . . . . .
Ann M. Sardini . . . . . . . . . . . .
Thilo Semmelbauer . . . . . . . . .
Melanie Stubbing . . . . . . . . . . .
Maurice Kelly . . . . . . . . . . . . .
(1) Options were granted during the fiscal year ended January 1, 2005 under the terms of our option
plan. None of these options were exercised under the plan during the fiscal year ended January 1,
2005. Options are exercisable based on vesting provisions outlined in the option agreement.
(2) Percentages of total options granted are based on total grants made to all employees during the
fiscal year ended January 1, 2005.
(3) The estimated grant dates present value is determined using the Black-Scholes model. The
adjustments and assumptions incorporated in the Black-Scholes model in estimating the value of
the grants include the following: (a) the exercise price of the options equals the fair market value
of the underlying stock on the date of grant; (b) an expected term of 5 to 7 years; (c) dividend
yield of 0%; (d) volatility of 33.3% to 33.4% and (e) a risk free interest rate of 2.72% to 4.41%.
The ultimate value, if any, an optionee will realize upon exercise of an option will depend on the
excess of the market value of our common stock over the exercise price of the option.
Under our 2004 Plan and 1999 Plan, we have the ability to grant stock options, restricted stock,
stock appreciation rights and other stock-based awards. Generally, stock options granted under the
1999 Plan vest and become exercisable in annual increments over five years with respect to one-third of
options granted, and the remaining two-thirds of the options vest on the ninth anniversary of the date
the options were granted, subject to accelerated vesting upon our achievement of certain performance
targets. For each year prior to and including 2003, these performance targets have been met. All new
options granted in 2003 and 2004 under this plan vest and become exercisable in annual increments
over one to five years and are not subject to performance targets. In any event, the options become
fully vested upon the occurrence of a change in control of our company. No grants have been made
under the 2004 Plan.
In April 2000, our Board of Directors adopted the WeightWatchers.com Stock Incentive Plan
pursuant to which selected employees were granted options to purchase shares of WeightWatchers.com
common stock. The number of shares available for grant under this plan is 400,000 shares of authorized
common stock of WeightWatchers.com. The following table sets forth certain information regarding
43
options granted during the year ended January 1, 2005 to the named executive officers under the
WeightWatchers.com Stock Incentive Plan:
WeightWatchers.com Option Grants
For the Fiscal Year Ended January 1, 2005
Individual Grants
Number of
Securities
Underlying
Options
Granted(1)
Percent of
Total Options
Granted to
Employees in
Fiscal Year Ended
January 1, 2005(2)
Exercise or
Base Price
(Per Share)
Expiration
Date
Grant
Date
Present
Value(3)
Name
Ann M. Sardini
. . . . . . . . . . . . . . .
11,385
50.0%
$7.14
July 22, 2014
$53,521
(1) Options were granted during the fiscal year ended January 1, 2005 under the terms of the option
plan. None of these options was exercised under the plan during the fiscal year ended January 1,
2005. Options are exercisable based on vesting provisions outlined in the option agreement.
(2) Percentages of total options granted are based on total grants made to all employees during the
fiscal year ended January 1, 2005.
(3) The estimated grant date present value is determined using the Black-Scholes model. The
adjustments and assumptions incorporated in the Black-Scholes model in estimating the value of
the grants include the following: (a) the exercise price of the option equals the fair market value of
the underlying stock on the date of grant; (b) an expected term of 7 years; (c) dividend yield of
0%; (d) volatility of 64% and (e) a risk free interest rate of 4.1%. The ultimate value, if any, an
optionee will realize upon exercise of an option will depend on the excess of the market value of
the common stock over the exercise price of the option.
Under our WeightWatchers.com Stock Incentive Plan, we have the ability to grant stock options,
restricted stock, stock appreciation rights and other stock-based awards on shares of
WeightWatchers.com common stock. Generally, stock options under the plan vest in annual increments
over five years upon our achievement of certain performance targets. These options are not exercisable
until the earlier to occur of (1) six months after the tenth anniversary of the date the option was
granted and (2) a public offering of WeightWatchers.com common stock or a private sale of the stock
in which an employee holding stock is entitled to participate under the terms of the sale participation
agreement entered into with Artal Luxembourg.
The following tables set forth the number and value of securities underlying unexercised options
held by each of our executive officers listed on the Summary Compensation Table above as of
44
January 1, 2005. None of our executive officers exercised any WeightWatchers.com options and they do
not have any stock appreciation rights.
Aggregated Options
Values as of January 1, 2005
Name
Fiscal Year Ended
January 1, 2005
Number of Weight Watchers
Securities Underlying
Unexercised Options at
January 1, 2005
Shares
Acquired in
Exercise(#) Realized Exercisable(#) Unexercisable(#)
Value
Linda Huett . . . . . . . . . . . . . . .
Ann M. Sardini
. . . . . . . . . . . .
Thilo Semmelbauer . . . . . . . . . .
Melanie Stubbing . . . . . . . . . . .
Maurice Kelly . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
318,483
40,000
—
9,400
10,000
200,000
100,000
100,000
47,600
50,000
Value of Weight Watchers
Unexercised In-The-Money
Options at January 1, 2005
Exercisable
Unexercisable
$12,403,320
190,000
$
—
48,880
52,000
$
$
$403,200
$333,600
$436,000
$219,820
$232,300
Number of WeightWatchers.com
Securities Underlying
Unexercised Options at
January 1, 2005
Value of
WeightWatchers.com
In-The-Money Options at
January 1, 2005(*)
Number of Heinz Securities
Underlying Unexercised Options
at January 1, 2005
Value of Heinz
In-The-Money Options at
January 1, 2005
Name
Exercisable(#) Unexercisable(#) Exercisable Unexercisable Exercisable(#) Unexercisable(#) Exercisable Unexercisable
Linda Huett . . . . . . .
Ann M. Sardini . . . . .
Thilo Semmelbauer . .
Melanie Stubbing . . . .
Maurice Kelly . . . . . .
11,385
5,692
—
—
—
—
5,693
—
—
—
N/A
N/A
—
—
—
N/A
N/A
—
—
—
40,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(*) The value of WeightWatchers.com options are not currently calculable as the underlying securities are not publicly traded.
Director Compensation
Our executive director and our directors who are associated with The Invus Group do not receive
compensation. Mr. Reed, Ms. Evans and Mr. Bard will receive (1) annual compensation in the amount
of $30,000, paid quarterly, half in cash and half in our common stock; (2) $1,000 per Audit Committee
meeting; (3) options for 2,000 shares of our common stock per year, with the third grant on
February 6, 2004 for Mr. Reed and Ms. Evans and November 11, 2004 for Mr. Bard, at an exercise
price equal to the closing price of our common stock on the day that the options are granted, the
options have a five year life and vest one year after the grant date; and (4) reimbursement of
reasonable out-of-pocket expenses associated with a director’s role on the Board of Directors.
45
Executive Savings and Profit Sharing Plan
We sponsor a savings plan for salaried and eligible hourly employees. This defined contribution
plan provides for employer matching contributions up to 100% of the first 3% of an employee’s eligible
compensation. The savings plan also permits employees to contribute between 1% and 13% of eligible
compensation on a pre-tax basis.
The savings plan also contains a profit sharing component for full-time salaried employees that are
not key management personnel, which provides for a guaranteed monthly employer contribution for
each participant based on the participant’s age and a percentage of the participant’s eligible
compensation. In addition, the profit sharing plan has a supplemental employer contribution
component, based on our achievement of certain annual performance targets, and a discretionary
contribution component.
We also established an executive profit sharing plan, which provides a non-qualified profit sharing
plan for key management personnel who are not eligible to participate in our profit sharing plan. This
non-qualified profit sharing plan has similar features to our profit sharing plan.
Continuity Agreements
Purpose; Covered Executives
The Board of Directors has determined that it is in the best interests of our stockholders to
reinforce and encourage the continued attention and dedication of our key executives to their duties
with us, without personal distraction or conflict of interest in circumstances that could arise in
connection with any change of ownership or control of the Company. Therefore, in October 2003, we
entered into continuity agreements with the following executives: Linda Huett, Ann Sardini, Robert
Hollweg, and certain other executive officers. These agreements contain terms that are substantially
similar to each other, except where described below.
Term of Agreements
These agreements have an initial term of three years from the date of execution, and continue to
renew annually thereafter unless either party provides 180-day advance written notice to the other party
that the term of the agreement will not renew. However, upon the occurrence of a ‘‘change in control’’
(as defined in the agreements), the term of the agreement may not terminate until the second
anniversary of the date of the change of ownership or control of the Company.
Severance Payments and Benefits.
If, within two years following a change of ownership or control of the Company, an executive’s
employment is terminated without cause by us or for good reason by the executive (as such terms are
defined in the agreements), the following executives will receive the following payments and benefits:
(cid:127) Ms. Huett, Ms. Sardini and Mr. Hollweg are entitled to receive the following:
(i) A lump sum cash payment equal to three times the sum of (x) the executive’s annual base
salary on the date of the change in control (or, if higher, the annual base salary in effect
immediately prior to the giving of the notice of termination) and (y) the executive’s target annual
bonus (the ‘‘target bonus’’) in respect of the fiscal year of the Company (a ‘‘fiscal year’’) in which
the termination occurs (or, if higher, the average annual bonus actually earned by the executive in
respect of the three full fiscal years prior to the year in which the notice of termination is given)
under our bonus plan;
(ii) A lump sum cash payment equal to the sum of (w) the executive’s unpaid base salary and
vacation days accrued through the date of termination, (x) the unpaid portion, if any, of bonuses
46
previously earned by the executive pursuant to our bonus plan, (y) in respect of the fiscal year in
which the date of termination occurs, the higher of (i) the pro rata portion of the executive’s
target bonus and (ii) if we are exceeding the performance targets established under our bonus plan
for such fiscal year as of the date of termination, the executive’s actual annual bonus payable
under our bonus plan based upon such achievement (this pro rata portion in either case calculated
from January 1 of such year through the date of termination) (the ‘‘pro rata bonus’’), and (z) any
other compensation previously deferred (excluding qualified plan deferrals by the executive under
or into our benefit plans);
(iii) Continued medical, dental, vision, and life insurance coverage (excluding accidental death
and disability insurance) (‘‘welfare benefit coverage’’) for the executive and the executive’s eligible
dependents or, to the extent welfare benefit coverage is not commercially available, such other
welfare benefit coverage reasonably acceptable to the executive, on the same basis as in effect
prior to the executive’s termination, for a period ending on the earlier of (x) the third anniversary
of the date of termination (this period, the ‘‘continuation period’’) and (y) the commencement of
comparable welfare benefit coverage by the executive with a subsequent employer;
(iv) Continued provision of the perquisites the executive enjoyed prior to the date of
termination for a period ending on the earlier of (x) the end of the continuation period and
(y) the receipt by the executive of comparable perquisites from a subsequent employer;
(v)
Immediate 100% vesting of all outstanding stock options, stock appreciation rights,
phantom stock units and restricted stock granted or issued by us prior to, on or upon the change
in control (to the extent not previously vested on or following the change in control);
(vi) Additional Company contributions to our qualified defined contribution plan and any
other retirement plans in which the executive participated prior to the date of termination during
the continuation period; provided, however, that where such contributions may not be provided
without adversely affecting the qualified status of such plan or where such contributions are
otherwise prohibited by any such plans, the executive shall instead receive an additional lump sum
payment equal to the contributions that would have been made during the continuation period if
the executive had remained employed with us during such period;
(vii) All other accrued or vested benefits in accordance with the terms of any applicable
Company plan, which vested benefits shall include the executive’s otherwise unvested account
balances in our qualified defined contribution plan, which shall become vested as of the date of
termination; and
(viii) If requested by the executive, outplacement services will be provided by a professional
outplacement provider selected by the executive at a cost to us of not more than $30,000.
(cid:127) Certain other executive officers are entitled to receive all of the same payments and benefits
described above, with the following differences:
(cid:127) the severance multiple in clause (i) above is reduced to two;
(cid:127) the period of time during which welfare benefit coverage is provided as described in
clause (iii) above, and which perquisites are provided as described in clause (iv) above, is
reduced to the earlier of (x) the second anniversary of the date of termination of
employment and (y) the commencement of comparable welfare benefit coverage and
perquisites, respectively, by the executive with a subsequent employer;
(cid:127) the contributions made by us into our qualified defined contribution plan and any other
retirement plans in which the executives participated (or lump sum payments in respect
thereof), as described in clause (vi) above, will only be in respect of the same period in
47
respect of which comparable welfare benefit coverage is provided, as described in clause (b)
above; and
(cid:127) the cost of outplacement services provided to the executives as described in clause (viii)
above shall not be more than $15,000.
Excess Parachute Payment Excise Taxes
If (i) it is determined that the payments and benefits provided under the agreements or otherwise
in the aggregate (a ‘‘parachute payment’’) would be subject to the excise tax imposed under the U.S.
Internal Revenue Code, and the aggregate value of the parachute payment exceeds a certain threshold
amount, calculated under the U.S. Internal Revenue Code (the ‘‘base amount’’) by 5% or less, then
(ii) the parachute payment will be reduced to the extent necessary so that the aggregate value of the
parachute payment is equal to an amount that is less than such threshold amount; provided, however,
that if the aggregate value of the parachute payment exceeds the threshold amount by more than 5%,
then the executive will be entitled to receive an additional payment or payments in an amount such
that, after payment by the executive of all taxes (including any interest or penalties imposed with
respect to such taxes), including any excise tax, imposed upon this payment, the executive retains an
amount equal to the excise tax imposed upon the parachute payment.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Principal Shareholders
The following table sets forth information regarding the beneficial ownership of our common stock
by (1) all persons known by us to own beneficially more than 5% of our common stock, (2) our chief
executive officer and each of the named executive officers, (3) each director and (4) all directors and
executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange
Commission. In computing the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days after January 1, 2005 are deemed issued and
outstanding. These shares, however, are not deemed outstanding for purposes of computing percentage
ownership of each other shareholder.
48
Our capital stock consists of common stock and preferred stock. As of January 1, 2005, there were
102,412,262 shares of our common stock outstanding and zero (0) shares of our preferred stock
outstanding.
Name of Beneficial Owner
As of
January 1, 2005
Shares
Percent
Artal Luxembourg(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FMR Corp.(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Artal Participations & Management S.A.(1) . . . . . . . . . . . . . . .
Linda Huett(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ann M. Sardini(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thilo Semmelbauer(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robert W. Hollweg(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Melanie Stubbing(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maurice Kelly(3)(4)(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raymond Debbane(3)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marsha Johnson Evans(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . .
Jonas M. Fajgenbaum(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sacha Lainovic(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sam K. Reed(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
John F. Bard(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Christopher J. Sobecki(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Philippe Amouyal(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All directors and executive officers as a group (13 people)(4) . .
59,772,567
8,473,220
4,493,258
412,691
40,000
—
272,706
9,400
10,000
—
6,986
—
—
16,986
6,704
—
—
765,473
58.4%
8.3%
4.4%
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
* Less than 1.0%
(1) Artal Luxembourg and Artal Participations and Management may be contacted at 105, Grand-Rue,
L-1661 Luxembourg, Luxembourg. The parent entity of Artal Luxembourg is Artal International.
The parent entity of Artal International is Artal Group. The parent entity of Artal Group is
Westend S.A. The parent entity of Artal Participations and Management is Artal Services N.V., a
Belgian company. The parent entity of Artal Services is Artal International. The address of
Westend S.A., Artal Group and Artal International is the same as the address of Artal
Luxembourg. The address of Artal Services is Woluwedal, 28 B-1932 St. Stevens—Woluwe
Belgium.
(2) FMR Corp. may be contacted at 82 Devonshire Street, Boston, MA 02109.
(3) Our executive officers and directors may be contacted c /o Weight Watchers International, Inc., 175
Crossways Park West, Woodbury, New York, 11797.
(4) Includes shares subject to purchase upon exercise of options exercisable within 60 days after
January 1, 2005, as follows: Ms. Huett 318,483 shares; Ms. Sardini 40,000 shares; Mr. Semmelbauer
0 shares; Mr. Hollweg 181,322 shares; Ms. Stubbing 9,400 shares; Mr. Kelly 10,000 shares;
Mr. Reed 6,000 shares; Ms. Evans 6,000 shares; and Mr. Bard 4,000 shares.
(5) Mr. Debbane is also a director of Artal Group. Artal Group is the parent entity of Artal
International, which is the parent entity of Artal Luxembourg. Artal International is the parent
entity of Artal Services, which is the parent entity of Artal Participations and Management.
Mr. Debbane disclaims beneficial ownership of all shares owned by Artal Luxembourg and Artal
Participations and Management.
(6) Mr. Kelly resigned as an executive officer effective January 31, 2005.
49
The following table summarizes our equity compensation plan information as of January 1, 2005.
Equity Compensation Plan Information
Plan category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available
for future issuance
Equity compensation plans approved by
security holders . . . . . . . . . . . . . . . . . . .
Equity compensation plans not approved by
security holders . . . . . . . . . . . . . . . . . . .
4,329,549
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,329,549
$14.80
—
$14.80
2,762,807
—
2,762,807
Item 13. Certain Relationships and Related Transactions
Shareholders’ Agreements
Shortly after our acquisition by Artal Luxembourg, we entered into a shareholders’ agreement with
Artal Luxembourg and Merchant Capital, Inc., Richard and Heather Penn, Longisland International
Limited, Envoy Partners and Scotiabanc, Inc. relating to their rights with respect to our common stock
held by parties, other than Artal Luxembourg. Without the consent of Artal Luxembourg, transfers of
our common stock by these shareholders are restricted with certain exceptions. Subsequent transferees
of our common stock must, subject to limited exceptions, agree to be bound by the terms and
provisions of the agreement. Additionally, this agreement provides the shareholders with the right to
participate pro rata in certain transfers of our common stock by Artal Luxembourg and grants Artal
Luxembourg the right to require the other shareholders to participate on a pro rata basis in certain
transfers of our common stock by Artal Luxembourg.
Registration Rights Agreement
Simultaneously with the closing of our acquisition by Artal Luxembourg, we entered into a
registration rights agreement with Artal Luxembourg and Heinz. The registration rights agreement
grants Artal Luxembourg the right to require us to register shares of our common stock for public sale
under the Securities Act (1) upon demand and (2) in the event that we conduct certain types of
registered offerings. Heinz has sold all shares of our common stock and accordingly no longer has any
rights under this agreement. Merchant Capital, Inc., Richard and Heather Penn, Long Island
International Limited, Envoy Partners and Scotiabanc, Inc. became parties to this registration rights
agreement under joinder agreements, and each acquired the right to require us to register and sell
their stock in the event that we conduct certain types of registered offerings.
Corporate Agreement
We have entered into a corporate agreement with Artal Luxembourg. We have agreed that so long
as Artal Luxembourg beneficially owns 10% or more, but less than a majority of our then outstanding
voting stock, Artal Luxembourg will have the right to nominate a number of directors approximately
equal to that percentage multiplied by the number of directors on our board. This right to nominate
directors will not restrict Artal Luxembourg from nominating a greater number of directors.
We have agreed with Artal Luxembourg that both we and Artal Luxembourg have the right to:
(cid:127) engage in the same or similar business activities as the other party;
(cid:127) do business with any customer or client of the other party; and
50
(cid:127) employ or engage any officer or employee of the other party.
Neither Artal Luxembourg nor we, nor our respective related parties, will be liable to each other
as a result of engaging in any of these activities.
Under the corporate agreement, if one of our officers or directors who also serves as an officer,
director or advisor of Artal Luxembourg becomes aware of a potential transaction related primarily to
the group education-based weight-loss business that may represent a corporate opportunity for both
Artal Luxembourg and us, the officer, director or advisor has no duty to present that opportunity to
Artal Luxembourg, and we will have the sole right to pursue the transaction if our board so
determines. If one of our officers or directors who also serves as an officer, director or advisor of Artal
Luxembourg becomes aware of any other potential transaction that may represent a corporate
opportunity for both Artal Luxembourg and us, the officer or director will have a duty to present that
opportunity to Artal Luxembourg, and Artal Luxembourg will have the sole right to pursue the
transaction if Artal Luxembourg’s board so determines. If one of our officers or directors who does not
serve as an officer, director or advisor of Artal Luxembourg becomes aware of a potential transaction
that may represent a corporate opportunity for both Artal Luxembourg and us, neither the officer nor
the director nor we have a duty to present that opportunity to Artal Luxembourg, and we may pursue
the transaction if our board so determines.
If Artal Luxembourg transfers, sells or otherwise disposes of our then outstanding voting stock, the
transferee will generally succeed to the same rights that Artal Luxembourg has under this agreement by
virtue of its ownership of our voting stock, subject to Artal Luxembourg’s option not to transfer those
rights.
WeightWatchers.com Note
On September 10, 2001, we amended and restated our loan agreement with WeightWatchers.com,
increasing the aggregate commitment thereunder to $34.5 million. The note bears interest at 13% per
year, beginning on January 1, 2002, which interest, except as set forth below, is paid semi-annually
starting on March 31, 2002. All principal outstanding under this note is payable in six semi-annual
installments, starting on March 31, 2004. The note may be prepaid at any time in whole or in part,
without penalty. In 2003, we received a $5.0 million early loan payment from WeightWatchers.com,
which reduced the principal balance outstanding to $29.5 million at January 3, 2004. In fiscal 2004, we
received two regularly scheduled principal payments aggregating $9.8 million, which reduced the
principal balance outstanding to $19.7 million at January 1, 2005.
WeightWatchers.com Warrant Agreements
Under the warrant agreements that we entered into with WeightWatchers.com, we have received
warrants to purchase an additional 6,394,997 shares of WeightWatchers.com’s common stock in
connection with the loans that we made to WeightWatchers.com under the note described above. These
warrants will expire from November 24, 2009 to September 10, 2011 and may be exercised at a price of
$7.14 per share of WeightWatchers.com’s common stock until their expiration. We own 20.1% of the
outstanding common stock of WeightWatchers.com, or approximately 38% on a fully diluted basis
(including the exercise of all options and all the warrants we own in WeightWatchers.com).
Collateral Assignment and Security Agreement
In connection with the WeightWatchers.com note, we entered into a collateral assignment and
security agreement whereby we obtained a security interest in the assets of WeightWatchers.com. Our
security interest in those assets will terminate when the note has been paid in full.
51
WeightWatchers.com Intellectual Property License
We have entered into an amended and restated intellectual property license agreement with
WeightWatchers.com that governs WeightWatchers.com’s right to use our trademarks and materials
related to the Weight Watchers program.
The amended and restated license agreement grants WeightWatchers.com the exclusive right to
(1) use any of our trademarks, service marks, logos, brand names and other business identifiers as part
of a domain name for a website on the Internet; (2) use any of the domain names we own; (3) use any
of our trademarks on the Internet and any other similar or related forms of interactive digital
transmission that now exists or may be developed later (provided that we and our affiliates, franchisees,
and licensees other than WeightWatchers.com can continue using the trademarks in connection with
online advertising and promotion of activities conducted offline); and (4) use any materials related to
the Weight Watchers program, including any text, artwork and photographs, and advertising, marketing
and promotional materials on the Internet. The license agreement also grants WeightWatchers.com a
non-exclusive right to (1) use any of our trademarks to advertise any approved activities that relate to
its online weight-loss business; and (2) create derivative works. All rights granted to
WeightWatchers.com must be used solely in connection with the conduct of its online weight-loss
business.
Beginning in January 2002, WeightWatchers.com began paying Weight Watchers International a
royalty of 10% of the net revenues it earns through its online activities. For fiscal 2004 and 2003,
Weight Watchers International earned royalties of $8.2 million and $7.1 million, respectively.
We retain exclusive ownership of all of the trademarks and materials that we license to
WeightWatchers.com and of the derivative works created by WeightWatchers.com.
All of the rights granted to WeightWatchers.com in the license agreement are subject to our
pre-existing agreements with third parties, including franchisees.
The license agreement provides us with control over the use of our intellectual property. In
particular, we have the right to approve WeightWatchers.com’s e-commerce activities, any materials,
sublicenses, communication to consumers, products, privacy policy, marketing programs, and materials
publicly displayed on the Internet. These controls are designed to protect the value of our intellectual
property.
WeightWatchers.com and we will jointly own user data collected through the website and both
parties are required to adhere to the site’s privacy policy.
WeightWatchers.com Service Agreement
Simultaneously with the signing of the amended and restated intellectual property license, we
entered into a service agreement with WeightWatchers.com, under which WeightWatchers.com provides
the following types of services:
(cid:127) information distribution services, which include the hosting, displaying and distributing on the
Internet of information relating to us and our affiliates and franchisees;
(cid:127) marketing services, which include the hosting, displaying and distributing on the Internet of
information relating to our products and services such as classroom meetings, the Weight
Watchers Magazine and At Home and similar products and services from our affiliates and
franchisees; and
(cid:127) customer communication services, which include establishing a means by which customers can
communicate with us on the Internet to ask questions related to our products and services and
the products and services of our affiliates and franchisees.
52
We are required to pay for all expenses incurred by WeightWatchers.com directly attributable to
the services it performs under this agreement, plus a fee of 10% of those expenses. In fiscal 2004 and
2003, service fees incurred by Weight Watchers International to WeightWatchers.com were $2.3 million
and $2.0 million, respectively.
WeightWatchers.com Shareholders’ Agreement
We entered into a shareholders’ agreement with WeightWatchers.com, Inc., Artal Luxembourg and
Heinz that governs our and Artal Luxembourg’s relationship with WeightWatchers.com as holders of its
common stock. Heinz has sold all of its shares in WeightWatchers.com back to WeightWatchers.com
and thus no longer has any rights under this agreement. Subsequent transferees of ours and of Artal
Luxembourg must, except for some limited exceptions, agree to be bound by the terms and provisions
of the agreement.
The shareholders’ agreement imposes on us restrictions on the transfer of common stock of
WeightWatchers.com until the earlier to occur of (1) September 29, 2004 and (2) WeightWatchers.com’s
initial public offering of common stock under the Securities Act, except for certain exceptions. We have
the right to participate pro rata in certain transfers of common stock of WeightWatchers.com by Artal
Luxembourg, and Artal Luxembourg has the right to require us to participate on a pro rata basis in
certain transfers of WeightWatchers.com’s common stock by it.
WeightWatchers.com Registration Rights Agreement
We have entered into a registration rights agreement with WeightWatchers.com, Artal Luxembourg
and Heinz with respect to our shares in WeightWatchers.com. Heinz has resold all of its shares in
WeightWatchers.com back to WeightWatchers.com and thus no longer has any rights under this
agreement. The registration rights agreement grants Artal Luxembourg the right to require
WeightWatchers.com to register its shares of WeightWatchers.com common stock upon demand and
also grants us and Artal Luxembourg rights to register and sell shares of WeightWatchers.com’s
common stock in the event WeightWatchers.com conducts certain types of registered offerings.
Nellson Co-Pack Agreement
We entered into an agreement with Nellson Nutraceutical, a former subsidiary of Artal
Luxembourg, to purchase snack bar and powder products manufactured by Nellson Nutraceutical for
sale in our meetings. On October 4, 2002, Nellson Nutraceutical was sold by Artal Luxembourg and at
such time, Nellson Nutraceutical was no longer considered a related party. Under our co-pack
agreement, Nellson Nutraceutical agreed to produce sufficient snack bar products to fill our purchase
orders within 30 days of Nellson Nutraceutical’s receipt of these purchase orders, and we are not bound
to purchase a minimum quantity of snack bar products. We purchased $24.4 million of products from
Nellson Nutraceutical during the fiscal year ended December 28, 2002. The term of the agreement
expired on December 31, 2004 and the parties are currently negotiating a renewal.
Item 14. Principal Accounting Fees and Services
The information required by this item will be contained in our definitive proxy statement to be
filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K and is incorporated by reference herein.
53
Item 15. Exhibits and Financial Statement Schedule
1. Financial Statements
PART IV
The financial statements listed in the Index to Financial Statements and Financial Statement
Schedule on page F-1 are filed as part of this Form 10-K.
2. Financial Statement Schedule
The financial statement schedule listed in the Index to Financial Statements and Financial
Statement Schedule on page F-1 is filed as part of this Form 10-K.
3. Exhibits
The exhibits listed in the Exhibit Index are filed as part of this Form 10-K.
54
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE COVERED BY
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Items 15(a) 1&2
Pages
Consolidated Balance Sheets at January 1, 2005 and January 3, 2004 . . . . . . . . . . . . . . . . . . . . .
F-2
Consolidated Statements of Operations for the fiscal years ended January 1, 2005, January 3,
2004 and December 28, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-3
Consolidated Statements of Changes in Shareholders’ Equity (Deficit), for the fiscal years ended
January 1, 2005, January 3, 2004 and December 28, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the fiscal years ended January 1, 2005, January 3,
2004 and December 28, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-4
F-5
F-6
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-35
Schedule II—Valuation and Qualifying Accounts and Reserves for the fiscal years ended
January 1, 2005, January 3, 2004 and December 28, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-37
All other schedules are omitted for the reason that they are either not required, not applicable, not
material or the information is included in the consolidated financial statements or notes thereto.
F-1
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AT
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables (net of allowances: January 1, 2005—$2,008
and January 3, 2004—$1,026) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise rights acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Portion of long-term debt due within one year . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note 15)
SHAREHOLDERS’ EQUITY
January 1,
2005
January 3,
2004
$ 35,156
$ 23,442
21,778
32,929
31,636
4,317
125,816
17,480
557,121
25,125
5,721
77,964
3,240
3,719
$816,186
$
3,000
20,760
27,173
35,079
34,684
4,844
27,082
152,622
466,125
715
285
619,747
18,545
39,110
29,724
3,970
114,791
15,747
496,261
23,779
2,454
110,631
4,583
2,440
$770,686
$ 15,554
22,287
20,799
34,379
24,624
166
16,527
134,336
454,320
832
10
589,498
Common stock, $0 par 1,000,000 shares authorized; 111,988 shares issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost, 9,575 shares at January 1, 2005 and 5,639 shares at
January 3, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . . . . . . . . . .
—
—
(222,547)
(233)
413,425
5,794
196,439
$816,186
(48,421)
(214)
223,557
6,266
181,188
$770,686
The accompanying notes are an integral part of the consolidated financial statements.
F-2
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Meeting fees, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product sales and other, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Online subscription fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 1,
2005
(52 Weeks)
$ 629,097
330,833
64,989
January 3,
2004
(53 Weeks)
$607,204
336,728
—
December 28,
2002
(52 Weeks)
$520,723
288,921
—
Revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,024,919
943,932
Cost of meetings, products and other . . . . . . . . . . . . . . . . . . . . . .
Cost of online subscriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
468,312
18,810
440,398
—
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
487,122
440,398
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
537,797
503,534
Marketing expenses
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income)/expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134,791
97,121
305,885
16,759
(4,685)
4,264
113,603
73,862
316,069
33,698
2,774
47,368
809,644
370,290
—
370,290
439,354
81,233
61,267
296,854
42,299
19,054
—
Income before income taxes and cumulative effect of accounting
change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
289,547
232,229
235,501
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94,522
88,288
Income before cumulative effect of accounting change . . . . . . . .
Cumulative effect of accounting change, net of tax . . . . . . . . . . . .
195,025
(11,941)
143,941
—
91,807
143,694
—
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 183,084
$143,941
$143,694
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
254
Net income available to common shareholders . . . . . . . . . . . .
$ 183,084
$143,941
$143,440
Basic Earnings Per Share:
Income before cumulative effect of accounting change . . . . . . . .
Cumulative effect of accounting change, net of tax . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted Earnings Per Share:
Income before cumulative effect of accounting change . . . . . . . .
Cumulative effect of accounting change, net of tax . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average common shares outstanding:
$
$
$
$
1.86
(0.11)
1.75
1.82
(0.11)
1.71
$
$
$
$
1.35
—
1.35
1.31
—
1.31
$
$
$
$
1.35
—
1.35
1.31
—
1.31
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
104,704
106,676
105,959
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
106,985
109,724
109,663
The accompanying notes are an integral part of the consolidated financial statements.
F-3
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(IN THOUSANDS)
Common Stock
Treasury Stock
Deferred
Shares Amount Shares Amount Compensation Income (Loss)
Total
Accumulated
Other
Retained
Comprehensive Earnings
(Deficit)
Balance at December 29, 2001 . . . . 111,988
Comprehensive Income:
$—
6,488
$ (26,196)
$ —
$(13,323)
$ (73,998) $(113,517)
Net income . . . . . . . . . . . . . . .
Translation adjustment, net of
taxes of $835 . . . . . . . . . . . .
Changes in fair value of
derivatives accounted for as
hedges, net of taxes of $(443) . .
Total Comprehensive Income . . . . .
Preferred stock dividend . . . . . . . .
Stock options exercised . . . . . . . . .
Tax benefit of stock options
exercised . . . . . . . . . . . . . . . .
Cost of secondary public equity
offering . . . . . . . . . . . . . . . . .
(777)
3,135
8,205
1,245
143,694
143,694
8,205
1,245
153,144
(254)
(1,441)
(254)
1,694
6,331
6,331
(850)
(850)
Balance at December 28, 2002 . . . . 111,988
Comprehensive Income:
$—
5,711
$ (23,061)
$ —
$ (3,873)
$ 73,482 $ 46,548
Net income . . . . . . . . . . . . . . .
Translation adjustment, net of
taxes of $4,116 . . . . . . . . . . .
Changes in fair value of
derivatives accounted for as
hedges, net of taxes of $1,687 . .
Total Comprehensive Income . . . . .
Stock options exercised . . . . . . . . .
Tax benefit of stock options
exercised . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . .
Restricted stock issued to employees
.
Compensation expense on restricted
stock awards . . . . . . . . . . . . . .
7,733
2,406
143,941
143,941
7,733
2,406
154,080
(1,452)
2,003
7,319
267
7,319
(28,815)
—
53
(856)
3,455
784
(28,815)
(267)
53
Balance at January 3, 2004 . . . . . . 111,988
Comprehensive Income:
$—
5,639
$ (48,421)
$(214)
$ 6,266
$223,557 $ 181,188
Net income . . . . . . . . . . . . . . .
Translation adjustment, net of
taxes of ($650) . . . . . . . . . . .
Changes in fair value of
derivatives accounted for as
hedges, net of taxes of ($128) . .
Total Comprehensive Income . . . . .
Stock options exercised . . . . . . . . .
Tax benefit of stock options
exercised . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . .
Restricted stock issued to employees
.
Compensation expense on restricted
stock awards . . . . . . . . . . . . . .
Cumulative effect of accounting
change . . . . . . . . . . . . . . . . . .
(673)
201
183,084
183,084
(673)
201
182,612
(1,076)
1,879
7,678
162
7,678
(177,081)
—
143
20
20
(732)
2,955
4,668
(177,081)
(162)
143
Balance at January 1, 2005 . . . . . . 111,988
$—
9,575
$(222,547)
$(233)
$ 5,794
$413,425 $ 196,439
The accompanying notes are an integral part of the consolidated financial statements.
F-4
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED
(IN THOUSANDS)
January 1,
2005
January 3,
2004
December 28,
2002
(52 Weeks)
(53 Weeks)
(52 Weeks)
$ 183,084
$ 143,941
$143,694
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to cash provided by operating activities:
Cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred financing costs
. . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on settlement of hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss (gain) on derivative instruments . . . . . . . . . . . . . . . . . . . . . .
Repayments from equity investee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for inventory obsolescence, other . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . .
Early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit of stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in cash due to:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes
11,941
8,935
1,308
143
(1,255)
22,024
1,318
(4,916)
728
5,474
(803)
4,264
7,678
144
(6,193)
2,718
(549)
(1,067)
(676)
4,533
13,605
—
5,894
1,248
53
5,381
16,906
(5,097)
(5,000)
552
4,627
7,271
47,368
7,319
(63)
861
1,149
(1,555)
(563)
(3,469)
(42)
6,318
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
252,438
233,099
Investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Web site development expeditures
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments from equity investee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:
Net increase in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from new term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of high-yield loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from settlement of hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium paid on extinguishment of debt and other costs . . . . . . . . . . . . . . . .
Redemption of redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of public equity offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash used for financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents and other . . . . . . . .
Impact of consolidating WeightWatchers.com . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of fiscal year
(5,163)
(1,557)
4,916
(61,881)
(2,189)
(65,874)
(1,609)
321,000
—
(456,055)
150,000
(15,541)
1,255
(1,331)
—
(2,896)
(177,081)
—
1,879
(180,379)
(164)
5,693
11,714
23,442
(5,029)
—
5,000
(210,470)
(1,121)
(211,620)
998
85,000
—
(58,447)
227,326
(244,919)
2,710
(42,980)
—
(2,366)
(28,815)
—
2,003
(59,490)
3,923
—
(34,088)
57,530
—
4,738
1,313
—
—
4,566
(174)
—
233
2,754
17,224
—
6,331
(156)
(5,099)
(12,443)
(9,131)
1,594
1,965
2,126
5,403
164,938
(4,889)
—
—
(68,148)
(827)
(73,864)
254
—
(1,249)
(35,338)
—
—
—
—
(25,000)
—
—
(850)
1,694
(60,489)
3,607
—
34,192
23,338
Cash and cash equivalents, end of fiscal year . . . . . . . . . . . . . . . . . . . . . . . . .
$ 35,156
$ 23,442
$ 57,530
The accompanying notes are an integral part of the consolidated financial statements.
F-5
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. Basis of Presentation
Consolidation:
The accompanying consolidated financial statements include the accounts of Weight Watchers
International, Inc., its majority-owned subsidiaries and WeightWatchers.com, Inc.
(‘‘WeightWatchers.com’’), the entity required to be consolidated pursuant to Financial Accounting
Standards Board Interpretation No. 46R, ‘‘Consolidation of Variable Interest Entities’’ (‘‘FIN 46R.’’)
The term ‘‘WWI’’ as used throughout these notes is used to indicate Weight Watchers International
and its majority-owned subsidiaries. The term ‘‘the Company’’ as used throughout these notes is used
to indicate WWI as well as WeightWatchers.com.
WWI operates and franchises territories offering weight loss and control programs through the
operation of classroom type meetings to the general public in the United States, Canada, Mexico, the
United Kingdom, Continental Europe, Australasia, South Africa, Israel and Brazil.
WeightWatchers.com develops and markets safe, sensible online weight management products on
the Internet through access to specified areas of its web site on a monthly subscription basis.
Recapitalization:
On September 29, 1999, WWI entered into a recapitalization and stock purchase agreement (the
‘‘Recapitalization’’) with its former parent, H.J. Heinz Company (‘‘Heinz’’). In connection with the
Recapitalization, WWI effectuated a stock split of 58,747.6 shares for each share outstanding and then
redeemed 164,442 shares of common stock from Heinz. After the redemption, Artal Luxembourg S.A.
(‘‘Artal’’) purchased 94% of WWI’s remaining common stock from Heinz. For U.S. Federal and State
tax purposes, the Recapitalization was treated as a taxable sale under Section 338(h)(10) of the Internal
Revenue Code of 1986, as amended. As a result, for tax purposes, WWI recorded a step-up in the tax
basis of net assets. For financial reporting purposes, a valuation allowance of approximately $72,100,
which has subsequently been reversed, was established against the corresponding deferred tax asset of
$144,200.
Common Stock Offering:
On November 15, 2001, WWI traded 17,400 shares of its common stock on the New York Stock
Exchange at an initial price to the public of $24.00 per share. The Company did not receive any of the
proceeds from the sale of shares pursuant to the IPO.
Simultaneous with the Recapitalization, WWI entered into a Registration Rights Agreement with
Artal, under which WWI is obligated, at the request of Artal, to register its common stock with the
Securities and Exchange Commission and pay all costs associated with such registration. As a result, all
costs incurred in connection with WWI’s common stock offering have been recorded in shareholders’
equity (deficit).
Secondary Stock Offering:
On September 23, 2002, WWI completed the secondary offering of 15,000 shares of common stock
at an initial price of $42.00 per share. The Company did not receive any of the proceeds from the sale
of shares pursuant to this secondary offering.
F-6
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. Summary of Significant Accounting Policies
Fiscal Year:
The Company’s fiscal year ends on the Saturday closest to December 31st and consists of either 52
or 53-week periods. Fiscal year 2003 contained 53 weeks while fiscal years 2004 and 2002 contained 52
weeks. WeightWatchers.com’s fiscal year ends on December 31st of each year. This difference in fiscal
years does not have a material effect on the consolidated financial statements.
Consolidation:
On January 17, 2003, the Financial Accounting Standards Board (‘‘FASB’’) issued Interpretation
No. 46 (‘‘FIN 46’’), to clarify when an entity should consolidate another entity known as a variable
interest entity (‘‘VIE’’). The standard required that, under certain circumstances, separate businesses
with some common ownership be consolidated for financial reporting purposes. Upon adoption of the
original FIN 46, the Company would not have met those circumstances, and it therefore would not
have consolidated WeightWatchers.com’s financial statements.
On December 24, 2003, the FASB issued FIN 46R, which replaced FIN 46. FIN 46R is applicable
for financial statements issued for reporting periods after March 15, 2004. FIN 46R requires that an
entity consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the
VIE’s expected losses, will receive a majority of the VIE’s expected residual returns, or both.
Based on the revisions in FIN 46R, WWI was required to reevaluate its relationship with its
affiliate and licensee, WeightWatchers.com. In the course of this reevaluation, it determined that
WeightWatchers.com was a variable interest entity under FIN 46R and that WWI was its primary
beneficiary. Effective April 3, 2004, the Company consolidated WeightWatchers.com. In accordance
with the provisions of FIN 46R, the Company recorded a charge of $11,941, including a tax charge of
$9,866, in the quarter ended April 3, 2004 for the cumulative effect of this accounting change. This
charge reflected the cumulative impact to the Company’s results of operations had WeightWatchers.com
been consolidated since its inception in September 1999. Beginning in the first fiscal quarter ended
April 3, 2004, the Company’s consolidated balance sheet includes the balance sheet of
WeightWatchers.com. Effective at the beginning of the second fiscal quarter of 2004, the Company’s
consolidated statement of operations and statement of cash flows include the results of
WeightWatchers.com. All intercompany balances have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements, in conformity with accounting principles generally
accepted in the United States of America, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, the Company evaluates its estimates and judgments,
including those related to inventories, the impairment analysis for goodwill and other indefinite-lived
intangible assets, income taxes, and contingencies and litigation. The Company bases its estimates on
historical experience and on various other factors and assumptions that it believes to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying
F-7
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. Summary of Significant Accounting Policies (Continued)
values of assets and liabilities that are not readily apparent from other sources. Actual amounts could
differ from these estimates.
Translation of Foreign Currencies:
For all foreign operations, the functional currency is the local currency. Assets and liabilities of
these operations are translated into U.S. dollars using the exchange rate in effect at the end of each
reporting period. Income statement accounts are translated at the average rate of exchange prevailing
during each reporting period. Translation adjustments arising from the use of differing exchange rates
from period to period are included in accumulated other comprehensive income (loss).
Foreign currency gains and losses arising from the translation of intercompany receivables with the
Company’s international subsidiaries are recorded as a component of other expense, net, unless the
receivable is considered long-term in nature, in which case the foreign currency gains and losses are
recorded as a component of other comprehensive income (loss).
Cash Equivalents:
Cash and cash equivalents are defined as highly liquid investments with original maturities of three
months or less. Cash balances may, at times, exceed insurable amounts. The Company believes it
mitigates this risk by investing in or through major financial institutions.
Inventories:
Inventories, which consist of finished goods, are stated at the lower of cost or market on a first-in,
first-out basis, net of reserves for obsolescence and shrinkage.
Property and Equipment:
Property and equipment are recorded at cost. For financial reporting purposes, equipment is
depreciated on the straight-line method over the estimated useful lives of the assets (3 to 10 years).
Leasehold improvements are amortized on the straight-line method over the shorter of the term of the
lease or the useful life of the related assets. Expenditures for new facilities and improvements that
substantially extend the useful life of an asset are capitalized. Ordinary repairs and maintenance are
expensed as incurred. When assets are retired or otherwise disposed of, the cost and related
depreciation are removed from the accounts and any related gains or losses are included in income.
Impairment of Long Lived Assets:
In accordance with the provisions of Statement of Financial Accounting Standards (‘‘SFAS’’)
No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets,’’ the Company reviews
long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not be fully recoverable.
F-8
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. Summary of Significant Accounting Policies (Continued)
Intangible Assets:
In accordance with the provisions of SFAS No. 141, ‘‘Business Combinations’’ and SFAS No. 142,
‘‘Goodwill and Other Intangible Assets,’’ beginning in fiscal 2002, the Company no longer amortizes
goodwill and other indefinite-lived intangible assets but conducts an annual review of these assets for
potential impairment. Finite-lived intangible assets are amortized using the straight-line method over
their estimated useful lives of three to 20 years.
The Company accounts for software costs under the American Institute of Certified Public
Accountants (‘‘AICPA’’) Statement of Position No. 98-1, ‘‘Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use,’’ which requires capitalization of certain costs
incurred in connection with developing or obtaining internally used software. Software costs are
amortized over 3 to 5 years.
Pursuant to Emerging Issues Task Force No. 00-2, ‘‘Web Site Development Costs’’ (‘‘EITF 00-2’’),
WeightWatchers.com applies AICPA Statement of Position No. 98-1 to account for web site
development costs. In accordance with EITF 00-2, WeightWatchers.com expenses all costs incurred
during the preliminary project stage and capitalizes all internal and external direct costs of materials
and services consumed in developing the software, once the development has reached the application
development stage. Application development stage costs generally include software configuration,
coding, installation to hardware and testing. These costs are amortized over their estimated useful life.
All costs incurred for upgrades, maintenance and enhancements, including the cost of web site content,
that does not result in additional functionality, are expensed as incurred.
Revenue Recognition:
WWI earns revenue by conducting meetings, selling products and aids in its meetings and to its
franchisees, collecting commissions from franchisees operating under the Weight Watchers name,
collecting royalties related to licensing agreements and selling advertising space in and copies of its
magazine. WWI charges non-refundable registration fees in exchange for an introductory information
session and materials it provides to new members. Revenue from these registration fees is recognized
when the service and products are provided, which is generally at the same time payment is received
from the customer. Revenue from meeting fees, product sales, commissions and royalties is recognized
when services are rendered, products are shipped to customers and title and risk of loss pass to the
customer, and commissions and royalties are earned. Advertising revenue is recognized when ads are
published. Revenue from magazine sales is recognized when the magazine is shipped. Deferred
revenue, consisting of prepaid lecture and magazine subscription revenue, is amortized into income
over the period earned. Discounts to customers, including free registration offers, are recorded as a
deduction from gross revenue in the period such revenue was recognized. WeightWatchers.com
generates revenue from monthly subscriptions to its web site. Subscription fee revenues are recognized
over the period that products are provided. One time sign up fees are deferred and recognized over the
expected customer relationship period. Subscription fee revenues that are paid in advance are deferred
and recognized on a straight-line basis over the subscription period. The Company grants refunds under
limited circumstances and at aggregate amounts that historically have not been material. Because the
period of payment generally approximates the period revenue was originally recognized, refunds are
recorded as a reduction of revenue when paid.
F-9
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. Summary of Significant Accounting Policies (Continued)
Advertising Costs:
Advertising costs consist primarily of national and local direct mail, television, and spokesperson’s
fees. All costs related to advertising are expensed in the period incurred, except for TV and radio
media related costs that are expensed the first time the advertising takes place. Total advertising
expenses for the fiscal years ended January 1, 2005, January 3, 2004 and December 28, 2002 were
$128,116 (including $13,723 of WeightWatchers.com advertising costs), $107,931 and $78,293,
respectively.
Income Taxes:
The Company provides for taxes based on current taxable income and the future tax consequences
of temporary differences between the financial reporting and income tax carrying values of its assets
and liabilities. Under SFAS No. 109, ‘‘Accounting for Income Taxes,’’ assets and liabilities acquired in
purchase business combinations are assigned their fair values and deferred taxes are provided for lower
or higher tax bases.
Derivative Instruments and Hedging:
The Company enters into forward and swap contracts to hedge transactions denominated in
foreign currencies to reduce the currency risk associated with fluctuating exchange rates. These
contracts are used primarily to hedge certain inter-company cash flows and for payments arising from
some of the Company’s foreign currency denominated obligations. In addition, the Company enters
into interest rate swaps to hedge a substantial portion of its variable rate debt.
In accordance with the provisions of SFAS No. 133, ‘‘Accounting for Derivative Instruments and
Hedging Activities,’’ and its related amendments, SFAS No. 138, ‘‘Accounting for Certain Derivative
Instruments and Certain Hedging Activities’’ and SFAS No. 149, ‘‘Amendment of Statement on
Derivative Instruments and Hedging Activities,’’ all derivative financial instruments are recorded on the
consolidated balance sheets at their fair value as either assets or liabilities. Changes in the fair value of
derivatives are recorded each period in earnings or accumulated other comprehensive income (loss),
depending on whether a derivative is designated and effective as part of a hedge transaction and, if it
is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated
other comprehensive income (loss) are included in earnings in the periods in which earnings are
affected by the hedged item. The receivable or payable associated with derivative contracts is included
in the balance of prepaid expenses or accounts payable, respectively.
Investments:
The Company uses the cost method to account for investments in which it holds 20% or less of
the investee’s voting stock and over which it does not have significant influence. When the Company
holds 50% or less of the investee’s voting stock and has the ability to exercise significant influence over
operating and financial policies of the investee, the investment is accounted for under the equity
method, unless the provisions of FIN 46R apply, as in the instance of WeightWatchers.com, which has
been consolidated since April 3, 2004.
F-10
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. Summary of Significant Accounting Policies (Continued)
Deferred Financing Costs:
Deferred financing costs consist of fees paid by the Company as part of the establishment,
exchange and/or modification of the Company’s long-term debt. During the fiscal years ended
January 1, 2005 and January 3, 2004, the Company incurred additional deferred financing costs of
$2,896 and $2,366, respectively, associated with the refinancing of its Credit Facility (as defined in
Note 6). Such costs are being amortized using the interest rate method over the term of the related
debt. Amortization expense for the fiscal years ended January 1, 2005, January 3, 2004 and
December 28, 2002 was $1,308, $1,248 and $1,313, respectively. In connection with the early
extinguishment of over 90% of its Senior Subordinated Notes, the Company wrote off $4,387 of
deferred financing costs in the fiscal year ended January 3, 2004. Additionally, in connection with the
refinancing of its Credit Facility, the Company wrote off deferred financing costs of $2,933 and $4,659
in the fiscal years January 1, 2005 and December 29, 2001, respectively. These amounts have been
recorded as a component of early extinguishment of debt. See Note 6 for details of the early
extinguishment and refinancing.
Comprehensive Income (Loss):
Comprehensive income (loss) represents the change in shareholders’ equity (deficit) resulting from
transactions other than shareholder investments and distributions. The Company’s comprehensive
income (loss) includes net income, changes in the fair value of derivative instruments and the effects of
foreign currency translations. At January 1, 2005 and January 3, 2004, the cumulative balance of
changes in fair value of derivative instruments, net of taxes, is ($70) and ($270), respectively. As of
January 1, 2005 and January 3, 2004, the cumulative balance of the effects of foreign currency
translations, net of taxes, is $5,864 and $6,536, respectively.
Stock Based Compensation:
In December 2002, the FASB issued SFAS No. 148, ‘‘Accounting for Stock-Based Compensation—
Transition and Disclosure,’’ an amendment of SFAS No. 123, ‘‘Accounting for Stock-Based
Compensation.’’ SFAS No. 148 provides two additional alternative transition methods for recognizing
an entity’s voluntary decision to change its method of accounting for stock-based employee
compensation to the fair value method. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 so that entities following the intrinsic value method of Accounting Principles Board
Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’ (‘‘APB 25’’), will be required to disclose
the pro forma effect of using the fair value method for any period for which an income statement is
presented. The disclosures are required to be made in annual financial statements and in quarterly
information provided to shareholders without regard to whether the entity has adopted the fair value
recognition provisions of SFAS No. 123. The Company adopted the disclosure provisions of SFAS
No. 148 beginning in the first quarter of 2003.
At January 1, 2005, the Company had stock-based employee compensation plans, which are
described more fully in Note 10. As permitted by SFAS No. 123, the Company applies the recognition
and measurement principles of APB 25 and related interpretations in accounting for those plans. No
compensation expense for employee stock options is reflected in earnings, as all options granted under
the plans had an exercise price equal to the market value of the common stock on the date of grant.
F-11
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. Summary of Significant Accounting Policies (Continued)
The following table illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123 in each fiscal year:
Net income, as reported . . . . . . . . . . . . . . . . . .
$183,084
$143,941
$143,694
January 1,
2005
January 3,
2004
December 28,
2002
Deduct:
Total stock-based employee compensation
expense determined under the fair value
method for all stock options awards, net of
related tax effect
. . . . . . . . . . . . . . . . . . . .
4,223
2,036
696
Pro forma net income . . . . . . . . . . . . . . . . . . . .
$178,861
$141,905
$142,998
Earnings per share:
Basic—as reported . . . . . . . . . . . . . . . . . . . . .
Basic—pro forma . . . . . . . . . . . . . . . . . . . . . .
Diluted—as reported . . . . . . . . . . . . . . . . . . .
Diluted—pro forma . . . . . . . . . . . . . . . . . . . .
$
$
$
$
1.75
1.71
1.71
1.67
$
$
$
$
1.35
1.33
1.31
1.29
$
$
$
$
1.35
1.35
1.31
1.30
Included in ‘‘Total stock-based compensation expense determined under the fair value method for
all stock option awards, net of related tax effect’’ is $463 of expense related to WeightWatchers.com
options.
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board issued Statement No. 123R, ‘‘Share-
Based Payment’’ (‘‘FAS 123R’’), which replaces FAS 123, ‘‘Accounting for Stock-Based Compensation’’
and supercedes Accounting Principles Board Opinion 25, ‘‘Accounting for Stock Issued to Employees.’’
FAS 123R eliminates the option of using the intrinsic value method to record compensation expense
related to stock-based awards to employees and instead requires companies to recognize the cost of
such awards based on their grant-date fair value over the related service period of such awards. The
Company will adopt the provisions of this standard beginning in the third quarter of fiscal 2005.
The Company has elected to apply the modified prospective transition method to all past awards
outstanding and unvested as of the date of adoption and will recognize the associated expense over the
remaining vesting period based on the fair values previously determined and disclosed as part of its
pro-forma disclosures. The Company will not restate the results of prior periods. Prior to the effective
date of FAS 123R, the Company will continue to provide the pro forma disclosures for past award
grants as required under FAS 123. The Company believes the pro forma disclosures in Note 2 provide
an appropriate short-term indicator of the level of expense that will be recognized in accordance with
FAS 123R. However, the total expense recorded in future periods will depend on several variables,
including the number of share-based payment awards that are granted in future periods and the fair
value of those awards.
F-12
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. Summary of Significant Accounting Policies (Continued)
The American Jobs Creation Act of 2004 (the ‘‘AJCA’’) was enacted on October 22, 2004 and
includes a special one-time deduction of 85% of certain foreign earnings repatriated to the U.S. In
December 2004, the FASB issued FSP FAS 109-2, Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the AJCA, allowing companies additional time to evaluate the
effect of the AJCA on plans for reinvestment or repatriation of foreign earnings. The Company is in
the process of evaluating the effects of the repatriation provision; however, the Company does not
expect to complete this evaluation until after Congress or the U.S. Treasury Department provides
further clarification on key elements of the provision. As such, the Company has not concluded its
analysis to determine whether, and to what extent, it might repatriate foreign earnings. The Company
expects to be in a position to finalize the assessment within a reasonable amount of time after the
issuance of clarifying U.S. Treasury or Congressional guidance.
Reclassification:
Certain prior year amounts have been reclassified to conform to the current year presentation.
3. Acquisitions
All acquisitions have been accounted for under the purchase method of accounting and,
accordingly, earnings have been included in the consolidated operating results of the Company since
the date of acquisition. During fiscal 2004 and 2003, the Company acquired certain assets of its
franchises as outlined below.
On August 22, 2004, the Company completed the acquisition of certain assets of its Fort Worth
franchisee, Weight Watchers of Fort Worth, Inc., for a purchase price of $30,000 that was financed
through cash from operations. The purchase price has been allocated to franchise rights ($29,421), fixed
assets ($226), inventory ($286) and other assets ($67). Pro forma results of operations, assuming this
acquisition had been completed at the beginning of fiscal 2004 and 2003, would not differ materially
from the reported results.
On May 9, 2004, the Company completed the acquisition of certain assets of its Washington, D.C.
area franchisee, F-W Family Corporation (d/b/a Weight Watchers of Washington, D.C.), for a purchase
price of $30,500, which was financed through cash from operations, plus assumed liabilities of $348.
The total purchase price has been allocated to franchise rights ($30,268), fixed assets ($300), inventory
($228) and other assets ($52). Pro forma results of operations, assuming this acquisition had been
completed at the beginning of fiscal 2004 and 2003, would not differ materially from the reported
results.
On November 30, 2003, the Company completed the acquisition of certain assets of two of its
franchisees, Weight Watchers of Dallas, Inc. and Pedebud, Inc. (d/b/a Weight Watchers of Northern
New Mexico), pursuant to the terms of a combined asset purchase agreement with these two entities
(collectively ‘‘Dallas/New Mexico’’) and the Company. The purchase price was $27,200 plus assumed
liabilities of $300, and was allocated to franchise rights ($26,874), property and equipment ($412), and
inventory ($214). The acquisition was financed through cash from operations. Pro forma results of
operations, assuming this acquisition had been completed at the beginning of fiscal 2003 and 2002
would not differ materially from the reported results.
F-13
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. Acquisitions (Continued)
On March 30, 2003, the Company completed the acquisition of certain assets of eight of the fifteen
franchises of The WW Group, Inc. and its affiliates (the ‘‘WW Group’’) pursuant to the terms of an
Asset Purchase Agreement executed on March 31, 2003 among the WW Group, The WW Group East
L.L.C., The WW Group West L.L.C., Cuida Kilos, S.A. de C.V., Weight Watchers North America, Inc.
and the Company. The purchase price for the acquisition was $180,700 plus assumed liabilities of $448
and acquisition costs of $866. The Company completed the purchase price allocation in the fourth
quarter of 2003 as follows: franchise rights ($177,128), inventory ($2,741), prepaid expenses ($36) and
property and equipment ($2,109). The acquisition was financed through cash from operations and
additional borrowings of $85,000 under a new Term Loan D under the Company’s Credit Facility, as
amended on April 1, 2003 (as defined in Note 6).
The following table presents unaudited pro forma financial information that reflects the
consolidated operations of the Company and the acquired franchises of the WW Group as if the
acquisition had occurred as of the beginning of the respective periods. The pro forma financial
information does not give effect to any synergies that might result nor any discontinued expenses from
the acquisition of the WW Group. Such discontinued expenses are estimated by management to be
approximately $3,300 and $12,000 for the years ended January 3, 2004 and December 28, 2002,
respectively. These expenses relate to corporate expenses of the owners of the WW Group and other
indirect expenses of non-acquired franchises for the periods detailed below. This pro forma information
does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative
of future results of operations of the consolidated companies.
Pro Forma
For the fiscal year ended
January 3,
2004
December 28,
2002
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . .
$963,644
$145,200
1.32
$
$885,510
$147,767
1.35
$
During 2003, the Company also completed the acquisition of franchises in Mexico and Hong Kong,
as well as a third party entity, Easy Slim, for a total purchase price of $1,271, which was paid with cash
from operations. As a result of these three acquisitions, the Company recorded goodwill of $395 and
franchise rights of $1,326. Pro forma results of operations, assuming these acquisitions had been
completed at the beginning of fiscal 2003 and 2002, would not differ materially from the reported
results.
4. Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, beginning in fiscal 2002, the Company no longer amortizes
goodwill or other indefinite lived intangible assets. The Company performed fair value impairment
testing as of January 1, 2005 and January 3, 2004 on its goodwill and other indefinite-lived intangible
assets and determined that no impairment existed. Unamortized goodwill is due mainly to the
acquisition of the Company by Heinz in 1978. The balance in goodwill increased during the year ended
January 1, 2005 primarily due to the Company’s purchase of the minority interest in one of its foreign
F-14
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. Goodwill and Other Intangible Assets (Continued)
subsidiaries. The goodwill balance increased during the fiscal year ended January 3, 2004 primarily due
to a small foreign acquisition. Franchise rights acquired are due mainly to acquisitions of the
Company’s franchised territories. The balance in franchise rights acquired increased during the year
ended January 1, 2005 primarily due to the acquisitions of our Washington, D.C. area and Fort Worth
franchises. The balance in franchise rights acquired increased during the year ended January 3, 2004
primarily due to the acquisitions of Dallas/New Mexico and the WW Group.
Also, in accordance with SFAS No. 142, aggregate amortization expense for finite lived intangible
assets was recorded in the amounts of $2,274 (including $1,061 for amortization of intangible assets of
WeightWatchers.com), $1,062 and $950 for the fiscal years ended January 1, 2005, January 3, 2004 and
December 28, 2002, respectively.
The carrying amount of amortized intangible assets as of January 1, 2005 and January 3, 2004 was
as follows:
Deferred software costs . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . .
Non-compete agreement . . . . . . . . . . .
Web site development costs . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . .
January 1, 2005
January 3, 2004
Gross
Carrying
Amount
$ 5,050
7,811
1,200
6,815
4,108
Accumulated
Amortization
$ 3,035
7,098
1,175
4,624
3,331
Gross
Carrying
Amount
$ 1,879
7,600
1,200
—
4,003
Accumulated
Amortization
$ 1,206
6,879
875
—
3,268
$24,984
$19,263
$14,682
$12,228
Estimated amortization expense of existing finite lived intangible assets for the next five fiscal years
is as follows:
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,012
$1,449
$ 427
$ 146
95
$
F-15
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. Property and Equipment
The components of property and equipment were:
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,984
39,870
$ 9,330
30,202
January 1,
2005
January 3,
2004
Less: Accumulated depreciation and amortization . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,854
33,374
17,480
—
39,532
23,819
15,713
34
$17,480
$15,747
Depreciation and amortization expense of property and equipment for the fiscal years ended
January 1, 2005, January 3, 2004 and December 28, 2002 was $6,661 (including $1,088 for depreciation
of assets of WeightWatchers.com) $4,832 and $3,788, respectively.
6. Long-Term Debt
The Company’s long-term debt is entirely attributable to WWI. WeightWatchers.com does not have
any credit facilities. The components of long-term debt are as follows:
January 1,
2005
January 3,
2004
Balance
Effective
rate
Balance
Effective
rate
A100.0 million 13% Senior Subordinated
Notes due 2009 . . . . . . . . . . . . . . . . . . .
$
—
$ 10,564
13.00%
$150.0 million 13% Senior Subordinated
Notes due 2009 . . . . . . . . . . . . . . . . . . .
Term Loan A due 2005 . . . . . . . . . . . . . . .
Transferable Loan Certificate due 2009 . . . .
Revolver due 2009 . . . . . . . . . . . . . . . . . . .
Term Loan B due 2010 . . . . . . . . . . . . . . .
Additional Term Loan B due 2010 . . . . . . .
Less Current Portion . . . . . . . . . . . . . . . . .
—
—
—
171,000
148,500
149,625
469,125
3,000
$466,125
5,130
24,340
48,903
—
3.24%
3.24% 380,937
—
3.60%
13.00%
3.04%
3.85%
3.56%
469,874
15,554
$454,320
Credit Facility
WWI’s Credit Agreement dated as of January 16, 2001 and as amended and restated as of
December 21, 2001, April 1, 2003, August 21, 2003, January 21, 2004 and October 19, 2004 (the
‘‘Credit Facility’’) consists of Term Loans and a revolving line of credit (‘‘the Revolver.’’)
F-16
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. Long-Term Debt (Continued)
On April 1, 2003, in connection with the acquisition of certain assets of the WW Group, WWI
borrowed $85,000 under a new Term Loan D pursuant to the Credit Facility, as amended on that date.
This loan was repaid and replaced as part of the August 21, 2003 refinancing, as explained below.
On August 21, 2003, in conjunction with the tender offer (as described below), WWI refinanced its
Credit Facility as follows: Term Loans B and D and the transferable loan certificate (‘‘TLC’’) in the
aggregate amount of $204,674 were repaid and replaced with a new Term Loan B in the amount of
$382,851 and a new TLC in the amount of $49,149. Term Loan A in the amount of $29,956 remained
in place along with a Revolver with available borrowings up to $45,000.
On January 21, 2004, WWI refinanced its Credit Facility as follows: the Term Loan A, Term
Loan B, and the TLC in the aggregate amount of $454,180 were repaid and replaced with a new Term
Loan B in the amount of $150,000 and borrowings under the Revolver of $310,000. In connection with
this refinancing, available borrowings under the Revolver increased from $45,000 to $350,000.
On October 19, 2004, WWI increased its net borrowing capacity by adding an Additional Term
Loan B to its existing Credit Facility in the amount of $150,000. Coterminous with the previously
existing Credit Facility, these funds were initially used to reduce borrowings under WWI’s Revolver,
resulting in no increase in WWI’s net borrowing.
Borrowings under the Credit Facility at January 1, 2005 are paid quarterly and bear interest at a
rate equal to LIBOR plus (a) in the case of the Term Loan B and the Revolver, 1.75% or, at WWI’s
option, the alternative base rate, as defined, plus 0.75% and (b) in the case of the Additional Term
Loan B, 1.50%, or at WWI’s option, the alternative base rate, as defined, plus 0.50%. Borrowings
under the Credit Facility at January 3, 2004 bore interest at a rate equal to LIBOR plus (a) in the case
of Term Loan A and the Revolver, 1.75% or, at WWI’s option, the alternate base rate, as defined, plus
0.75% and, (b) in the case of Term Loan B and the TLC, 2.25% or, at WWI’s option, the alternate
base rate plus 1.25%.
At January 1, 2005, interest rates for the Term Loan B, Additional Term Loan B and Revolver
were 4.16%, 3.77% and 4.03%, respectively. At January 3, 2004, interest rates for the Term Loan A,
Term Loan B and TLC were 2.93%, 3.43% and 3.44%, respectively. In addition to paying interest on
outstanding principal under the Credit Facility, WWI is also required to pay a commitment fee to the
lenders under the Revolver with respect to the unused commitments. This rate was 0.375% and 0.50%
per year for the years ended January 1, 2005 and January 3, 2004, respectively. All assets of WWI
collateralize the Credit Facility.
The Credit Facility contains customary covenants including covenants that in certain circumstances
restrict WWI’s ability to incur additional indebtedness, pay dividends on and redeem capital stock,
make other restricted payments, including investments, sell its assets and enter into consolidations,
mergers and transfers of all or substantially all of its assets. The Credit Facility also requires WWI to
maintain specific financial ratios and satisfy financial condition tests. The Credit Facility contains
customary events of default. Upon the occurrence of an event of default under the Credit Facility, the
lenders may cease making loans and declare amounts outstanding to be immediately due and payable.
F-17
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. Long-Term Debt (Continued)
Due to the early extinguishment of the Term Loans resulting from the January 2004 refinancing,
the Company recognized expenses of $3,254 for the year ended January 1, 2005, which included the
write-off of unamortized debt issuance costs of $2,933 and $321 of fees associated with the transaction.
Senior Subordinated Notes
As part of the Recapitalization, WWI issued $150,000 USD denominated and A100,000 euro
denominated principal amount of 13% Senior Subordinated Notes due 2009 (the ‘‘Notes’’) to qualified
institutional buyers.
In fiscal 2003, WWI successfully completed a tender offer and consent solicitation to purchase
96.6% of its $150,000 USD denominated ($144,900) and 91.6% of its A100,000 euro denominated
(A91,600) Notes. The consideration for the tender offer and consent solicitation was funded from cash
from operations of $57,292 and additional borrowings under the Credit Facility of $227,326 (as
described above). On October 1, 2004, WWI repurchased and retired the remaining balance of its
Notes in the amounts of $5,100 USD denominated and A8,400 euro-denominated. Due to this early
extinguishment of debt, the Company recognized expenses of $1,010 in the fiscal year ended January 1,
2005 related to the tender premiums associated with this redemption, and $47,368 in the fiscal year
ended January 3, 2004, which included tender premiums of $42,619, the write-off of unamortized debt
issuance costs of $4,387 and $362 of fees associated with the transaction.
At January 3, 2004, the euro notes of A8,388 translated into $10,564. The unrealized impact of the
change in foreign exchange rates related to euro denominated debt was reflected in other expense, net.
The Company used interest rate swaps and foreign currency forward contracts in association with its
debt. As of January 3, 2004, 100% of the Company’s euro denominated Notes were effectively hedged
through the use of a cash flow hedge.
Maturities
At January 1, 2005, the aggregate amounts of existing long-term debt maturing in each of the next
five years and thereafter are as follows:
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,000
3,000
3,000
3,000
385,781
71,344
$469,125
7. Redeemable Preferred Stock
WWI issued 1,000 shares of Series A Preferred Stock to Heinz in conjunction with the
Recapitalization. On March 1, 2002, WWI redeemed from Heinz all of its Series A Preferred Stock for
a redemption price of $25,000 plus accrued and unpaid dividends. The redemption was financed
F-18
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. Redeemable Preferred Stock (Continued)
through additional borrowings of $12,000 under the Credit Facility (as defined in Note 6), which was
repaid by the end of the second quarter 2002, and cash from operations.
8. Treasury Stock
On October 9, 2003, the Company, at the direction of WWI’s Board of Directors, authorized a
program to repurchase up to $250,000 of the Company’s outstanding common stock. The repurchase
program allows for shares to be purchased from time to time in the open market or through privately
negotiated transactions. No shares will be purchased from Artal Luxembourg or its affiliates under the
program. In the fourth quarter of 2003, the Company purchased 784 shares of common stock in the
open market at a total cost of $28,815. In fiscal 2004, the Company purchased 4,668 shares of common
stock in the open market at a total cost of $177,081.
9. Earnings Per Share
Basic earnings per share (‘‘EPS’’) computations are calculated utilizing the weighed average
number of common shares outstanding during the periods presented. Diluted EPS is calculated utilizing
the weighted average number of common shares outstanding adjusted for the effect of dilutive common
stock equivalents.
F-19
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. Earnings Per Share (Continued)
The following table sets forth the computation of basic and diluted EPS.
January 1,
2005
January 3,
2004
December 28,
2002
Numerator:
Income before cumulative effect of accounting change . . . . . . . .
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$195,025
—
$143,941
—
$143,694
254
Income available to common shareholders before cumulative
effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of accounting change, net of tax . . . . . . . . . . .
195,025
(11,941)
143,941
—
143,440
—
Net income available to common shareholders . . . . . . . . . . . . . .
$183,084
$143,941
$143,440
Denominator:
Weighted average common shares outstanding . . . . . . . . . . . . . .
Effect of dilutive stock options . . . . . . . . . . . . . . . . . . . . . . . . .
104,704
2,281
106,676
3,048
Weighted average diluted common shares outstanding . . . . . . . .
106,985
109,724
Basic EPS:
Income available to common shareholders before cumulative
effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of accounting change, net of tax . . . . . . . . . . .
Net income available to common shareholders . . . . . . . . . . . . . .
Diluted EPS:
Income available to common shareholders before cumulative
effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of accounting change, net of tax . . . . . . . . . . .
Net income available to common shareholders . . . . . . . . . . . . . .
$
$
$
$
1.86
(0.11)
1.75
1.82
(0.11)
1.71
$
$
$
$
1.35
—
1.35
1.31
—
1.31
105,959
3,704
109,663
$
$
$
$
1.35
—
1.35
1.31
—
1.31
For the fiscal 2004, 2003 and 2002 computations 410, 391 and 10 stock options, respectively, were
excluded from the calculation of weighted average shares for diluted EPS because their effects were
anti-dilutive.
10. Stock Plans
WWI Incentive Compensation Plans:
On May 12, 2004 and December 16, 1999, respectively, the WWI stockholders approved the 2004
Stock Incentive Plan (the ‘‘2004 Plan’’) and the 1999 Stock Purchase and Option Plan (the ‘‘1999
Plan’’) of WWI. These plans are designed to promote the long-term financial interests and growth of
WWI by attracting and retaining management with the ability to contribute to the success of the
business. The Board of Directors or a committee thereof administers the plans.
F-20
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. Stock Plans (Continued)
Under the 2004 Plan, grants may take the following forms at the committee’s sole discretion:
incentive stock options, stock appreciation rights, restricted stock and other stock-based awards. The
maximum number of shares available for grant under the 2004 Plan is 2,500 as of the plan’s effective
date. No awards have yet been made under the 2004 Plan.
Under the 1999 Plan, grants may take the following forms at the committee’s sole discretion:
incentive stock options, other stock options (other than incentive options), stock appreciation rights,
restricted stock, purchase stock, dividend equivalent rights, performance units, performance shares and
other stock-based grants. The maximum number of shares available for grant under this plan was 5,647
shares of authorized common stock as of the plan’s effective date. In 2001, the number of shares
available for grant was increased to 7,058 shares.
Under the stock purchase component of the 1999 Plan, 1,639 shares of common stock were sold to
45 members of WWI’s management group at a price of $2.13 to $4.04 per share.
Pursuant to the restricted stock component of the 1999 Plan, the Company granted 5 and 7 shares
of restricted stock to certain employees during fiscal 2004 and 2003, respectively. The weighted average
grant date fair value of these shares was $39.01 and $39.35 for shares granted in fiscal 2004 and 2003,
respectively. These shares vest over a period of three to five years and resulted in compensation
expense of $143 and $53 for the fiscal years ended January 1, 2005 and January 3, 2004, respectively.
Pursuant to the option component of the 1999 Plan, the Board of Directors authorized the
Company to enter into agreements under which certain members of management received
Non-Qualified Time and Performance Stock Options providing them the opportunity to purchase shares
of WWI’s common stock at an exercise price of $2.13 to $45.50. The options are exercisable based on
the terms outlined in the agreement. The exercise price was equivalent to the fair market value of
WWI’s common stock at the date of grant.
The fair value of each option is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
January 1,
2005
January 3, December 28,
2004
2002
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . 2.3%-4.4% 2.6%-3.7% 3.5%-5.2%
Expected term (years) . . . . . . . . . . . . . . . . . . . .
0%
36.5%
0%
34.5%
0%
32.4%
5.8
5.6
7.0
F-21
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. Stock Plans (Continued)
A summary WWI’s stock option activity is as follows:
January 1, 2005
January 3, 2004
December 28, 2002
Number of
Shares
Weighted
average
exercise price
Number of
Shares
Weighted
average
exercise price
Number of
Shares
Weighted
average
exercise price
Options outstanding,
Beginning of year . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . .
Options outstanding, end of year . .
Options exercisable, end of year
. .
Options available for grant, end of
4,501
855
(732)
(294)
4,330
2,872
$ 8.19
$38.41
$ 2.51
$12.83
$14.80
$ 3.56
year . . . . . . . . . . . . . . . . . . . . .
263
Weighted-average fair value of
$ 3.68
$40.61
$ 2.29
$14.63
$ 8.19
$ 2.80
4,896
543
(855)
(83)
4,501
2,971
827
$ 2.35
$37.37
$ 2.18
$ 2.28
$ 3.68
$ 2.26
5,671
181
(776)
(180)
4,896
2,950
1,293
options granted during the year .
$14.40
$16.01
$17.41
The following table summarizes information about WWI stock options outstanding at January 1,
2005 by range of exercise price:
Range of
Exercise Prices
$2.13-$2.34
$4.04
$35.87-$45.50
Shares
Outstanding
2,608
246
1,476
4,330
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (Yrs.)
5.1
6.5
6.0
Weighted
Average
Exercise
Price
$ 2.13
$ 4.04
$38.97
Weighted
Average
Exercise
Price
$ 2.13
$ 4.04
$37.58
Shares
Exercisable
2,598
167
107
2,872
WeightWatchers.com Stock Incentive Plan of Weight Watchers International, Inc. and Subsidiaries:
In April 2000, the Board of Directors of WWI adopted the WeightWatchers.com Stock Incentive
Plan of Weight Watchers International, Inc. and Subsidiaries, pursuant to which selected employees
were granted options to purchase shares of common stock of WeightWatchers.com that are owned by
WWI. The number of shares available for grant under this plan is 400 shares of authorized common
stock of WeightWatchers.com. All options vest over a period of time, however, vesting of certain
options may be accelerated if WWI achieves specified performance levels. During the year ended
January 1, 2005, 23 options have been granted under this plan. No options have been granted under
this plan during the fiscal years ended January 3, 2004 or December 28, 2002.
F-22
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. Stock Plans (Continued)
A summary of the stock option activity under the WeightWatchers.com Stock Incentive Plan is as
follows:
January 1, 2005
January 3, 2004
December 28, 2002
Number of
Shares
Weighted
average
exercise price
Number of
Shares
Weighted
average
exercise price
Number of
Shares
Weighted
average
exercise price
Options outstanding, beginning of
year . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . .
Options outstanding, end of year . . .
Options exercisable, end of year . . . .
Options available for grant, end of
151
23
—
(23)
151
141
$0.50
$7.14
$0.50
$1.50
$1.14
year . . . . . . . . . . . . . . . . . . . . . . .
249
Weighted average fair value of
$0.50
—
—
$0.50
$0.50
$0.50
152
—
—
(1)
151
133
249
164
$0.50
$0.50
$0.50
$0.50
(12)
152
115
248
options granted during the year(1) .
$4.70
—
—
(1) The fair value of each option is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions: (a) the exercise price of the
options equals the fair value of the underlying stock on the date of grant; (b) an expected term of
7 years; (c) dividend yield of 0%; (d) volatility of 64% and (e) a risk-free interest rate of 4.1%.
The following table summarizes information about stock options outstanding under the
WeightWatchers.com Stock Incentive Plan at January 1, 2005 by range of exercise price:
Options Outstanding
Options Exercisable
Range of
Exercise
Prices
$0.50
$7.14
Shares
Outstanding
128
23
151
Weighted
Average
Remaining
Contractual
Life (Yrs.)
5.3
9.6
Weighted
Average
Exercise
Price
$0.50
$7.14
Weighted
Average
Exercise
Price
$0.50
$7.14
Shares
Exercisable
128
13
141
WeightWatchers.com Stock Option Plan
WeightWatchers.com may grant incentive stock options and/or nonqualified stock options on its
common stock to its employees, consultants and certain non-employees under the terms of its stock
option plans. WeightWatchers.com is authorized to grant options to purchase a total of 3,400 shares of
its common stock under these plans. At January 1, 2005, there were options to purchase 2,806 shares of
WeightWatchers.com common stock outstanding.
F-23
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. Stock Plans (Continued)
Due to the adoption of FIN 46R (see Note 1), the fair value of stock options granted by
WeightWatchers.com are included in the pro forma footnote disclosures showing the impact to the
Company’s results had it adopted the fair value provisions of SFAS No. 123 (see Note 2). The fair
value of options granted by WeightWatchers.com during fiscal 2004 were estimated on their date of
grant using the Black-Scholes option pricing model with the following weighted average assumptions:
(a) dividend yield of 0%, (b) volatility of 64%, (c) risk-free interest rate of 3.0%—3.9% and
(d) expected term of 5 years.
11. Income Taxes
Although consolidated for financial reporting purposes under FIN 46R, WWI and
WeightWatchers.com are separate tax paying entities. The following tables summarize the consolidated
provision for U.S. federal, state and foreign taxes on income:
January 1,
2005
January 3,
2004
December 28,
2002
Current:
U.S federal
. . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$41,043
5,075
26,381
$40,527
10,740
20,344
$72,499
$71,611
Deferred:
. . . . . . . . . . . . . . . . . . . . . . . . . .
U.S federal
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,705
1,900
(582)
$15,173
1,734
(230)
Total tax provision . . . . . . . . . . . . . . . . . . . . . . .
$94,522
$88,288
$22,023
$16,677
$55,670
14,650
16,921
$87,241
$ 4,565
397
(396)
$ 4,566
$91,807
The components of the Company’s consolidated income before income taxes and the cumulative
effect of accounting change consist of the following:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$208,553
80,994
$170,196
62,033
$185,610
49,891
$289,547
$232,229
$235,501
January 1,
2005
January 3,
2004
December 28,
2002
F-24
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. Income Taxes (Continued)
The difference between the U.S. federal statutory tax rate and the Company’s consolidated
effective tax rate are as follows:
January 1,
2005
January 3,
2004
December 28,
2002
U.S. federal statutory rate . . . . . . . . . . . . . . . . .
Federal and state tax reserve reversal . . . . . . . . .
States income taxes (net of federal benefit) . . . . .
Reduction in valuation allowance . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . .
35.0%
(2.5)
2.7
(3.5)
0.9
32.6%
35.0%
(0.2)
4.0
—
(0.8)
38.0%
35.0%
(0.2)
4.0
—
0.2
39.0%
The deferred tax assets (liabilities) recorded on the Company’s consolidated balance sheet are as
follows:
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for estimated expenses . . . . . . . . . . . . . . . . . . . . . .
Operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . .
WeightWatchers.com loan . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 1,
2005
January 3,
2004
$75,449
1,872
5,811
—
2,194
(1,593)
$ 96,615
1,442
3,814
11,505
2,067
—
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$83,733
$115,443
Depreciation/amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,109)
(1,061)
(85)
(3,756)
$
—
—
(65)
(1,775)
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (7,011)
$ (1,840)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$76,722
$113,603
As of January 1, 2005 and January 3, 2004, various foreign subsidiaries of WWI had net operating
loss carry forwards of approximately $7,956 and $12,387 respectively, most of which can be carried
forward indefinitely.
As discussed in Note 2, beginning in the first fiscal quarter ended April 3, 2004, the Company’s
consolidated balance sheet includes the balance sheet of WeightWatchers.com. Accordingly, on April 3,
2004, the Company consolidated a deferred tax asset in the amount of $10,248 due to
WeightWatchers.com’s net operating loss carryforwards, which were offset by a full valuation allowance.
During 2004, WeightWatchers.com received a current benefit of $5,546 from its deferred tax asset as a
result of the utilization of net operating loss carryforwards. Due to the recent trend in profitability of
WeightWatchers.com, it is now more likely than not that WeightWatchers.com will fully realize the
F-25
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. Income Taxes (Continued)
benefit of its deferred tax assets. As such, in the fourth quarter of 2004, WeightWatchers.com reversed
all of its remaining valuation allowance except for $1,593 relating to its foreign operations.
As of January 1, 2005, WeightWatchers.com has net operating loss carryforwards of approximately
$10,500 for federal income tax purposes. These losses are available to reduce future
WeightWatchers.com taxable income and will begin to expire at varying amounts after 2019.
The Company’s undistributed earnings of foreign subsidiaries are no longer considered to be
reinvested permanently. Accordingly, the Company has recorded all taxes, after taking into account
foreign tax credits, on the undistributed earnings of foreign subsidiaries.
12. Related Party Transactions
WeightWatchers.com:
On September 29, 1999, WWI entered into a subscription agreement with WeightWatchers.com,
Artal and Heinz under which Artal, Heinz and WWI purchased common stock of WeightWatchers.com
for a nominal amount. WWI owns approximately 20.1% of WeightWatchers.com’s common stock while
Artal owns approximately 72.8% of WeightWatchers.com’s common stock.
Under the agreement with WeightWatchers.com, WWI granted it an exclusive license to use its
trademarks, copyrights and domain names in electronic media in connection with its online weight-loss
business. The license agreement provides WWI with control of how its intellectual property is used. In
particular, WWI has the right to approve WeightWatchers.com’s e-commerce activities, marketing
programs, privacy policy and materials publicly displayed on the Internet. These controls are designed
to protect the value of WWI’s intellectual property.
Under warrant agreements dated November 24, 1999, October 1, 2000, May 3, 2001, and
September 10, 2001, WWI has received warrants to purchase an additional 6,395 shares of
WeightWatchers.com’s common stock in connection with the loans that WWI has made to
WeightWatchers.com under the note described below. These warrants will expire from November 24,
2009 to September 10, 2011 and may be exercised at a price of $7.14 per share of
WeightWatchers.com’s common stock until their expiration. The exercise price and the number of
shares of WeightWatchers.com’s common stock available for purchase upon exercise of the warrants
may be adjusted from time to time upon the occurrence of certain events.
Due to the adoption of FIN 46R, the Company’s consolidated financial statements include the
financial statements of WeightWatchers.com beginning April 3, 2004. As a result, for all periods
through and including the first quarter of 2004, WWI’s transactions with WeightWatchers.com were not
considered intercompany activities and therefore, the resulting income/(expense) has been included in
the Company’s consolidated results of operations. Beginning in the second quarter of 2004 with the
adoption of FIN 46R, all transactions with WeightWatchers.com are now considered intercompany
activities and, therefore, are eliminated in consolidation.
The Company’s consolidated results for the year ended January 1, 2005 include only the income/
(expense) resulting from WWI’s activities with WeightWatchers.com that took place in the first quarter
of 2004. However, the Company’s consolidated results for the years ended January 3, 2004 and
F-26
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. Related Party Transactions (Continued)
December 28, 2002 include all the income/(expense) resulting from WWI’s activities with
WeightWatchers.com that took place during each respective period.
Loan Agreement:
Pursuant to the amended loan agreement dated September 10, 2001 between WWI and
WeightWatchers.com, WWI provided loans to WeightWatchers.com through fiscal year 2001 aggregating
$34,500. WWI has no further obligation to provide funding to WeightWatchers.com. By the end of
2001, having reviewed the loan balances quarterly for impairment, WWI recorded a full valuation
allowance against the balances. Beginning on January 1, 2002, the loan bears interest at 13% per year
and beginning March 31, 2002, interest has been and shall be paid to WWI semi-annually. All principal
outstanding under the agreement is payable in six semi-annual installments that commenced on
March 31, 2004.
For the years ended January 1, 2005, January 3, 2004 and December 28, 2002, the Company
recorded interest income on the loan of $949, $4,219 and $4,454, respectively. As of January 3, 2004
and December 28, 2002, the interest receivable balance was $1,009 and $1,106, respectively, and is
included within receivables, net. Other income recorded by the Company resulting from loan
repayments was $4,917, $5,000 and $0 for the years ended January 1, 2005, January 3, 2004 and
December 28, 2002, respectively.
Intellectual Property License:
WWI entered into an amended and restated intellectual property license agreement dated
September 29, 2001 with WeightWatchers.com. In fiscal 2002, WWI began earning royalties pursuant to
the agreement. For the years ended January 1, 2005, January 3, 2004 and December 28, 2002, the
Company recorded royalty income of $1,954, $7,080 and $4,175, respectively, which was included in
product sales and other, net. As of January 3, 2004 and December 28, 2002, the receivable balance was
$1,758 and $1,280, respectively, and is included within receivables, net.
Service Agreement:
Simultaneous with the signing of the amended and restated intellectual property license agreement,
WWI entered into a service agreement with WeightWatchers.com, under which WeightWatchers.com
provides certain types of services. WWI is required to pay for all expenses incurred by
WeightWatchers.com directly attributable to the services it performs under this agreement, plus a fee of
10% of those expenses. The Company recorded service expense of $558, $1,971, and $1,862 for the
years ended January 1, 2005, January 3, 2004 and December 28, 2002, respectively, that was included in
marketing expenses. The accrued service payable at January 3, 2004 and December 28, 2002 was $1,223
and $484, respectively, and is netted against receivables, net.
Nellson Agreement:
On November 30, 1999, WWI entered into an agreement with Nellson Neutraceutical, Inc.
(‘‘Nellson’’), which until October 4, 2002 was a wholly-owned subsidiary of Artal, to purchase nutrition
bar products manufactured by Nellson for sale at the Company’s meetings. Upon sale by Artal, Nellson
F-27
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. Related Party Transactions (Continued)
is no longer considered a related party. The term of the agreement ran through December 31, 2004.
Total purchases from Nellson for the fiscal year ended December 28, 2002 were $24,351, which
represented approximately 21% of total inventory purchases for the year.
Management Agreement:
Simultaneous with the closing of WWI’s acquisition by Artal, WWI entered into a management
agreement with The Invus Group, LLC (‘‘Invus’’), the independent investment advisor to Artal. Under
this agreement, Invus provided WWI with management, consulting and other services in exchange for
an annual fee equal to the greater of $1,000 or one percent of WWI’s EBITDA (as defined in the
indentures relating to WWI’s Senior Subordinated Notes), plus any related out-of-pocket expenses. This
agreement has been terminated effective December 28, 2002. These management fees, recorded in
other expense, net for the fiscal year ended December 28, 2002 were $2,838.
Heinz:
At the closing of the Recapitalization, WWI granted to Heinz an exclusive worldwide, royalty-free
license to use the Custodial Trademarks (or any portion covering food and beverage products) in
connection with Heinz licensed products. Heinz paid WWI an annual fee of $1,200 for five years in
exchange for the Company serving as the custodian of the Custodial Trademarks.
As of January 1, 2005 and January 3, 2004, other accrued liabilities include $1,519 and $1,965,
respectively, primarily consisting of food royalties received on behalf of Heinz.
13. Employee Benefit Plans
The Company sponsors the Weight Watchers Savings Plan (the ‘‘Savings Plan’’) for salaried and
hourly employees of WWI. The Savings Plan is a defined contribution plan that provides for employer
matching contributions up to 100% of the first 3% of an employee’s eligible compensation. The Savings
Plan also permits employees to contribute between 1% and 13% of eligible compensation on a pre-tax
basis. Expense related to these contributions for the fiscal years ended January 1, 2005, January 3, 2004
and December 28, 2002 was $1,361, $1,228 and $1,033, respectively.
The Company sponsors the Weight Watchers Profit Sharing Plan (the ‘‘Profit Sharing Plan’’) for all
full-time salaried employees of WWI who are eligible to participate in the Savings Plan (except for
certain senior management personnel). The Profit Sharing Plan provides for a guaranteed monthly
employer contribution on behalf of each participant based on the participant’s age and a percentage of
the participant’s eligible compensation. The Profit Sharing Plan has a supplemental employer
contribution component, based on WWI’s achievement of certain annual performance targets, which
are determined annually by the Board of Directors. The Company also reserves the right to make
additional discretionary contributions to the Profit Sharing Plan. Expense related to these contributions
for the fiscal years ended January 1, 2005, January 3, 2004 and December 28, 2002 was $1,808, $1,655
and $1,560, respectively.
For certain senior management personnel of WWI, the Company sponsors the Weight Watchers
Executive Profit Sharing Plan. Under the Internal Revenue Service (‘‘IRS’’) definition, this plan is
considered a Nonqualified Deferred Compensation Plan. There is a promise of payment by the
F-28
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. Employee Benefit Plans (Continued)
Company made on the employees’ behalf instead of an individual account with a cash balance. The
account is valued at the end of each fiscal month, based on an annualized interest rate of prime plus
2%, with an annualized cap of 15%. Expense related to these contributions for the fiscal years ended
January 1, 2005, January 3, 2004 and December 28, 2002 was $947, $774, and $567, respectively.
During fiscal 2002, the Company received a favorable determination letter from the IRS that
qualifies WWI’s Savings Plan under Section 401(a) of the IRS Code.
The Company also sponsors the WeightWatchers.com Savings Plan for salaried and hourly
employees of WeightWatchers.com. This plan is a defined contribution plan that permits employees to
contribute between 1% and 13% of eligible compensation on a pre-tax basis. There are no employer
matching contributions and therefore no expense is recognized for this plan in the consolidated
financial statements.
14. Cash Flow Information
Net cash paid during the year for:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncash investing and financing activities were
as follows:
Fair value of net assets acquired in connection
January 1,
2005
January 3,
2004
December 28,
2002
$13,564
$53,102
$38,533
$59,739
$41,588
$75,684
with the acquisitions . . . . . . . . . . . . . . . . . . . .
$
811
$ 4,797
$
461
15. Commitments and Contingencies
Legal:
On February 18, 2005, WWI satisfactorily settled the lawsuit with CoolBrands International, Inc.
(‘‘CoolBrands’’) and as of May 1, 2005, CoolBrands will no longer manufacture, sell, market or
distribute ice cream and frozen novelty products using WWI’s trademarks. On August 3, 2004, WWI
filed a lawsuit to enforce the sell-off provisions of the CoolBrands license. On August 11, 2004,
CoolBrands filed a lawsuit in the Supreme Court, State of New York, Nassau County, against WWI and
Wells’ Dairy Inc., WWI’s new licensee for ice cream and frozen novelty products effective October 1,
2004.
Due to the nature of its activities, the Company is, at times, also subject to pending and
threatened legal actions that arise out of the normal course of business. In the opinion of management,
based in part upon advice of legal counsel, the disposition of all such matters is not expected to have a
material effect on the Company’s results of operations, financial condition or cash flows.
F-29
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. Commitments and Contingencies (Continued)
Lease Commitments:
Minimum rental commitments under non-cancelable operating leases, primarily for office and
rental facilities, at January 1, 2005, consist of the following:
WWI
Watchers.com Consolidated
Weight
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 and thereafter . . . . . . . . . . . . . . . . . . . . .
$23,958
18,883
12,878
7,254
6,049
23,505
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$92,527
$1,831
1,820
1,524
228
—
—
$5,403
$25,789
20,703
14,402
7,482
6,049
23,505
$97,930
Total rent expense charged to operations under these leases for the fiscal years ended January 1,
2005, January 3, 2004 and December 28, 2002 was $27,198, (including $1,167 related to rent expense of
WeightWatchers.com) $23,855 and $16,321, respectively.
16. Segment and Geographic Data
Effective with the adoption of FIN 46R in the first quarter of 2004 (see Note 1), the Company
now has two reportable operating segments: Weight Watchers International and WeightWatchers.com,
its affiliate and licensee. Since these are two separate and distinct businesses, the financial information
for each company is maintained and managed separately. The results of operations and assets for each
of these segments are derived from each company’s financial reporting system. All intercompany
activity is eliminated in consolidation. Since FIN 46R was adopted as of the last day of the first quarter
of 2004, WeightWatchers.com’s results of operations for the three months ended April 3, 2004 have
been included in the charge for the cumulative effect of accounting change. Therefore, the measure of
profitability for WeightWatchers.com for the fiscal year ended January 1, 2005 includes only their
results of operations beginning with the second quarter of 2004. Prior to April 3, 2004, the Company
was engaged principally in one line of business, weight loss, products and services. Therefore, segment
information is not presented for fiscal 2003 or fiscal 2002.
F-30
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. Segment and Geographic Data (Continued)
Information about the Company’s reportable operating segments is as follows:
Year Ended January 1, 2005
Weight
Watchers
Weight
International Watchers.com
Revenues from external customers . . . . . . . . . . .
Intercompany revenue . . . . . . . . . . . . . . . . . . . .
$959,930
6,205
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . .
$966,135
$64,989
1,678
$66,667
Depreciation and amortization . . . . . . . . . . . . . .
$
8,095
$ 2,148
Operating income . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . .
Other (income)/expense, net . . . . . . . . . . . . . .
Early extinguishment of debt . . . . . . . . . . . . . .
Provision for/(benefit from) taxes . . . . . . . . . . .
$289,917
14,611
(9,292)
4,264
101,100
$16,011
2,299
(310)
—
(4,660)
Intercompany
Eliminations
Consolidated
$
— $1,024,919
—
(7,883)
(7,883)
$1,024,919
$
$
— $
10,243
(43)
(151)
4,917
—
(1,918)
$ 305,885
16,759
(4,685)
4,264
94,522
Income before cumulative effect of accounting
change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$179,234
$18,682
$ (2,891)
$ 195,025
Weighted average diluted shares outstanding . . . .
106,985
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$796,231
$30,793
$(10,838)
$ 816,186
F-31
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. Segment and Geographic Data (Continued)
The following table presents information about the Company’s sources of revenue and other
information by geographic area. There were no material amounts of sales or transfers among
geographic areas and no material amounts of United States export sales.
NACO meeting fees . . . . . . . . . . . . . . . . . . . .
International company-owned meeting fees
. . .
Product sales . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise royalties . . . . . . . . . . . . . . . . . . . . .
Online subscription fees . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . . . . . . . . . .
Continental Europe . . . . . . . . . . . . . . . . . . . .
Australia, New Zealand and other . . . . . . . . . .
January 1,
2005
$ 373,119
255,978
274,640
18,789
64,989
37,404
Revenues
January 3,
2004
$392,432
214,772
276,835
24,879
—
35,014
December 28,
2002
$350,683
170,043
237,602
31,347
—
19,969
$1,024,919
$943,932
$809,644
January 1,
2005
$ 606,916
163,338
196,953
57,712
Revenues
January 3,
2004
$599,944
140,886
159,155
43,947
December 28,
2002
$542,885
112,750
117,425
36,584
$1,024,919
$943,932
$809,644
Long-Lived Assets
January 1,
2005
January 3,
2004
December 28,
2002
United States . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . . . . . . . . . .
Continental Europe . . . . . . . . . . . . . . . . . . . .
Australia, New Zealand and other . . . . . . . . . .
$ 572,012
2,383
3,376
27,676
$506,004
2,653
3,153
26,431
$299,349
2,854
2,537
18,302
$ 605,447
$538,241
$323,042
17. Financial Instruments
Fair Value of Financial Instruments:
The Company’s significant financial instruments include cash and cash equivalents, short and
long-term debt, current and noncurrent notes receivable, currency exchange agreements.
In evaluating the fair value of significant financial instruments, the Company generally uses quoted
market prices of the same or similar instruments or calculates an estimated fair value on a discounted
cash flow basis using the rates available for instruments with the same remaining maturities. As of
January 1, 2005, the fair value of financial instruments held by the Company, approximated the
recorded value.
F-32
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
17. Financial Instruments (Continued)
Derivative Instruments and Hedging:
The Company entered into forward and swap contracts to hedge transactions denominated in
foreign currencies to reduce currency risk associated with fluctuating exchange rates. These contracts
were used primarily to hedge certain foreign currency cash flows and for payments arising from some
of the Company’s foreign currency denominated debt obligations. In addition, the Company enters into
interest rate swaps to hedge a substantial portion of its variable rate debt. As of January 1, 2005, the
Company held contracts to purchase interest rate swaps with notional amounts totaling $150,000 and to
sell interest rate swaps with notional amounts totaling $150,000. As of January 3, 2004 and
December 28, 2002 the Company held currency and interest rate swap contracts to purchase certain
foreign currencies and interest rate swaps totaling $255,156 and $92,936, respectively. The Company
also held separate currency and interest rate swap contracts to sell foreign currencies and interest rate
swaps of $256,564 and $96,051, respectively. The Company is hedging forecasted transactions for
periods not exceeding the next three years. At January 1, 2005, given the current configuration of its
debt, the Company estimates that no derivative gains or losses reported in accumulated other
comprehensive income (loss) will be reclassified to the Statement of Operations within the next twelve
months.
As of January 1, 2005 and January 3, 2004, cumulative losses for qualifying hedges were reported
as a component of accumulated other comprehensive loss in the amount of $70 ($115 before taxes) and
$270 ($443 before taxes), respectively. The Company discontinued certain of its cash flow hedges that
were associated with the euro denominated Notes that were extinguished, as described in Note 6. As
such, in fiscal 2003, the Company reclassified a net loss of $5,381 from accumulated other
comprehensive income to other expense, net. In addition, the Company recorded net proceeds of
$2,710 from the gain on settlement in cash from financing activities in the Statement of Cash Flows as
cash flows from hedge transactions are classified in a manner consistent with the item being hedged.
The ineffective portion of changes in fair values of qualifying cash flow hedges was not material. Prior
to the extinguishment of the euro denominated Notes, the Company hedged 24% of the outstanding
principal of the euro Notes via forward contracts, subsequent to the extinguishment, but prior to the
repurchase of the remaining Notes, the Company was 100% hedged. As such, to offset gains or losses
from changes in foreign exchange rates related to the euro denominated Notes for the fiscal years
ended January 1, 2005 and January 3, 2004, the Company reclassified $6 ($9 before taxes) and $310
($508 before taxes) from accumulated other comprehensive income (loss) to other expense, net.
For the fiscal years ended January 1, 2005 and January 3, 2004 fair value adjustments for
non-qualifying hedges resulted in a reduction to net income of $798 ($1,309 before taxes) and $2,136
($3,502 before taxes), included within other expense, net, respectively. In addition, for the fiscal year
ended December 28, 2002, the Company terminated all non-qualifying hedges resulting in an increase
to net income of $1,439 ($2,359 before taxes), included within other expense, net.
F-33
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
18. Quarterly Financial Information (Unaudited)
The following is a summary of the unaudited quarterly consolidated results of operations for the
fiscal years ended January 1, 2005 and January 3, 2004.
Fiscal year ended January 1, 2005
Revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Fiscal Quarters Ended
April 3,
2004
July 3,
2004
October 2,
2004
January 1,
2005
$281,367
$ 82,216
$ 36,757
$264,892
$ 86,974
$ 52,886
$245,915
$ 73,818
$ 50,232
$232,745
$ 62,877
$ 43,209
$
$
0.35
0.34
$
$
0.50
0.49
$
$
0.48
0.47
$
$
0.42
0.41
For the Fiscal Quarters Ended
March 29,
2003
June 28,
2003
September 27,
2003
January 3,
2004
Fiscal year ended January 3, 2004
Revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$251,479
$ 79,414
$ 40,581
$258,869
$ 97,636
$ 53,774
$
$
0.38
0.37
$
$
0.50
0.49
$217,498
$ 74,018
$ 11,482
$
$
0.11
0.10
$216,086
$ 65,001
$ 38,104
$
$
0.36
0.35
Basic and diluted EPS are computed independently for each of the periods presented. Accordingly,
the sum of the quarterly EPS amounts may not agree to the total for the year. Beginning in the second
quarter of fiscal 2004, the Company’s results include the results of WeightWatchers.com (see Note 2 for
further details).
F-34
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Weight Watchers International, Inc.:
We have completed an integrated audit of Weight Watchers International Inc.’s 2004 consolidated
financial statements and of its internal control over financial reporting as of January 1, 2005 and audits
of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index appearing under
Item 15(a)(1) on page F-1 present fairly, in all material respects, the financial position of Weight
Watchers International, Inc. and its subsidiaries at January 1, 2005 and January 3, 2004, and the results
of their operations and their cash flows for each of the three years in the period ended January 1, 2005
in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index appearing under Item
15(a)(2) on page F-1 presents fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal
Control over Financial Reporting appearing under Item 9A, that the Company maintained effective
internal control over financial reporting as of January 1, 2005 based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in
our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of January 1, 2005, based on criteria established in Internal Control—Integrated Framework
issued by COSO. The Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on management’s assessment and on the
effectiveness of the Company’s internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of internal control over financial
reporting includes obtaining an understanding of internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinions.
F-35
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control over Financial Reporting, management
has excluded WeightWatchers.com from its assessment of the effectiveness of internal control over
financial reporting as of January 1, 2005. WeightWatchers.com is a variable interest entity required to
be consolidated with Weight Watchers International, Inc. under the provisions of FASB Interpretation
No. 46R during 2004. Since it does not have the contractual right, authority or ability, in practice, to
assess the internal controls over financial reporting of WeightWatchers.com, nor does it have the ability
to dictate or modify those controls, management has concluded it is unable to assess the effectiveness
of the internal control over financial reporting of WeightWatchers.com. We have also excluded
WeightWatchers.com from our audit of the effectiveness of internal control over financial reporting. As
of and for the year ended January 1, 2005, Weight Watchers International, Inc.’s consolidated financial
statements include total assets and total revenues of 3.8% and 6.8%, respectively, related to
WeightWatchers.com.
PricewaterhouseCoopers LLP
New York, New York
March 11, 2005
F-36
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
Additions
Balance at Charged to
Beginning Costs and
of Period
Charged
to Other
Expenses Accounts(2) Deductions(1)
Balance at
End
of Period
FISCAL YEAR ENDED JANUARY 1, 2005
Allowance for doubtful accounts . . . . . . . . . . . .
Inventory reserves, other . . . . . . . . . . . . . . . . .
Tax valuation allowance . . . . . . . . . . . . . . . . . .
$1,049
$1,026
$2,666
$6,043
$ — $ — $10,249
(67)
$ — $
$ — $(5,801)
$(8,656)
$2,008
$2,908
$1,593
FISCAL YEAR ENDED JANAURY 3, 2004
Allowance for doubtful accounts . . . . . . . . . . . .
Inventory reserves, other . . . . . . . . . . . . . . . . .
$ 707
$2,828
$ 557
$5,439
$ — $ (238)
$ — $(5,601)
$1,026
$2,666
FISCAL YEAR ENDED DECEMBER 28, 2002
Allowance for doubtful accounts . . . . . . . . . . . .
Inventory reserves, other . . . . . . . . . . . . . . . . .
$ 726
$2,709
$ 223
$2,883
$ — $ (242)
$ — $(2,764)
$ 707
$2,828
(1) Primarily represents the utilization of established reserves, net of recoveries.
(2) Represents WeightWatchers.com’s tax valuation allowance recorded via consoldiation under
FIN 46R.
F-37
EXHIBIT INDEX
Exhibit
Number
Description
**2.1 — Recapitalization and Stock Purchase Agreement, dated July 22, 1999, among Weight
Watchers International, Inc., H.J. Heinz Company and Artal International S.A. is
incorporated herein by reference to Exhibit 2 filed with the Registrant’s Registration
Statement on Form S-4 (File No. 333-92005) as filed on December 2, 1999.
**2.2 — Asset Purchase Agreement, dated as of March 31, 2003, by and among the WW Group,
Inc., The WW Group East L.L.C., The WW Group West L.L.C., Cuida Kilos, S.A. de
C.V., Weight Watchers North America, Inc. and Weight Watchers International, Inc. is
incorporated herein by reference to Exhibit 2.1 filed with the Registrant’s Current Report
on Form 8-K dated April 1, 2003.
**3.1 — Amended and Restated Articles of Incorporation of Weight Watchers International, Inc. is
incorporated herein by reference to Exhibit 3.1 filed with the Registrant’s Annual Report
on Form 10-K for the fiscal year ended December 29, 2001.
**3.2 — Amended and Restated By-laws of Weight Watchers International, Inc. is incorporated
herein by reference to Exhibit 3.2 filed with the Registrant’s Annual Report on
Form 10-K for the fiscal year ended December 29, 2001.
**3.3 — Articles of Amendment to the Articles of Incorporation, as Amended and Restated, of
Weight Watchers International, Inc., to Create a New Series of Preferred Stock
Designated as Series B Junior Participating Preferred Stock, adopted as of November 14,
2001 is incorporated herein by reference to Exhibit 3.3 filed with the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 29, 2001.
**4.1 — Rights Agreement, dated as of November 15, 2001 between Weight Watchers
International Inc. and Equiserve Trust Company, N.A. is incorporated herein by reference
to Exhibit 4.5 to the Registrant’s Registration Statement on Form S-3 (File
No. 333-89444) as filed on May 31, 2002.
**4.2 — First Amendment dated as of November 4, 2003, to the Rights Agreement, dated as of
November 15, 2001 by and between Weight Watchers International, Inc. and EquiServe
Trust Company, N.A. is incorporated herein by reference to Exhibit 4.3 filed with the
Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
September 27, 2003.
**4.3 — Specimen of stock certificate representing Weight Watchers International Inc.’s common
stock, no par value is incorporated herein by reference to Exhibit 4.6 with Amendment
No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-69362) as
filed on November 9, 2001.
**10.1 — Fifth Amended and Restated Credit Agreement, dated as of January 21, 2004, among
Weight Watchers International, Inc., Credit Suisse First Boston, The Bank of Nova Scotia
and various financial institutions.
**10.2 — Supplement, dated as of October 19, 2004, to the Fifth Amended and Restated Credit
Agreement, dated as of January 21, 2004, among Weight Watchers International, Inc. and
various financial institutions is incorporated herein by reference to Exhibit 10.1 filed with
the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
October 2, 2004.
Exhibit
Number
Description
**10.3 — License Agreement, dated as of September 29, 1999, between WW Foods, LLC and
Weight Watchers International, Inc. is incorporated herein by reference to Exhibit 10.4
filed with the Registrant’s Registration Statement on Form S-4 (File No. 333-92005) as
filed on December 2, 1999.
**10.4 — LLC Agreement, dated as of September 29, 1999, between H.J. Heinz Company and
Weight Watchers International, Inc. is incorporated herein by reference to Exhibit 10.7
filed with the Registrant’s Registration Statement on Form S-4 (File No. 333-92005) as
filed on December 2, 1999.
*10.5 — Operating Agreement, dated as of September 29, 1999, between Weight Watchers
International, Inc. and H.J. Heinz Company.
**10.6 — Stockholders’ Agreement, dated as of September 30, 1999, among Weight Watchers
International, Inc., Artal Luxembourg S.A., Merchant Capital, Inc., Logo Incorporated
Pty. Ltd., Longisland International Limited, Envoy Partners and Scotiabanc, Inc. is
incorporated herein by reference to Exhibit No. 10.9 filed with Amendment No. 1 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-69362) as filed on
October 29, 2001.
**10.7 — Registration Rights Agreement, dated September 29, 1999, among WeightWatchers.com,
Weight Watchers International, Inc., H.J. Heinz Company and Artal Luxembourg S.A. is
incorporated herein by reference to Exhibit 10.10 filed with the Registrant’s Registration
Statement on Form S-4 (File No. 333-92005) as filed on December 2, 1999.
**10.8 — Stockholders’ Agreement, dated September 29, 1999, among WeightWatchers.com, Weight
Watchers International, Inc., Artal Luxembourg S.A., H.J. Heinz Company is incorporated
herein by reference to Exhibit 10.11 filed with the Registrant’s Registration Statement on
Form S-4 (File No. 333-92005) as filed on December 2, 1999.
**10.9 — Letter Agreement, dated as of September 29, 1999, between Weight Watchers
International, Inc. and The Invus Group, LLC is incorporated herein by reference to
Exhibit 10.12 filed with the Registrant’s Registration Statement on Form S-4 (File
No. 333-92005) as filed on March 2, 2000.
**10.10 — Amendment to Letter Agreement, dated as of October 19, 2001, between Weight
Watchers International, Inc. and The Invus Group, LLC is incorporated herein by
reference to Exhibit 10.13 filed with the Registrant’s Annual Report on Form 10-K for
the fiscal year ended December 29, 2001.
**10.11 — Amendment to Letter Agreement, dated as January 24, 2003 between Weight Watchers
International, Inc. and The Invus Group, LLC is incorporated herein by reference to
Exhibit 10.14 filed with the Registrant’s Annual Report on Form 10-K for the fiscal year
ended December 28, 2002.
**10.12 — Agreement of Lease, dated as of August 1, 1995, between Industrial & Research
Associates Co. and Weight Watchers International, Inc. is incorporated herein by
reference to Exhibit 10.13 filed with the Registrant’s Registration Statement on Form S-4
(File No. 333-92005) as filed on March 2, 2000.
**10.13 — Lease Agreement, dated as of April 1, 1997, between Junto Investments and Weight
Watchers North America, Inc. is incorporated herein by reference to Exhibit 10.14 filed
with the Registrant’s Registration Statement on Form S-4 (File No. 333-92005) as filed on
December 2, 1999.
Exhibit
Number
Description
**10.14 — Lease Agreement, dated as of August 31, 1995, between 89 State Line Limited
Partnership and Weight Watchers North America, Inc. is incorporated herein by reference
to Exhibit 10.15 filed with the Registrant’s Registration Statement on Form S-4 (File
No. 333-92005) as filed on December 2, 1999.
**10.15 — Weight Watchers Savings Plan, dated as of October 3, 1999, as amended, is incorporated
herein by reference to Exhibit 10.17 filed with the Registrant’s Annual Report on
Form 10-K for the fiscal year ended December 29, 2001.
**10.16 — Weight Watchers Executive Profit Sharing Plan, dated as of October 4, 1999 is
incorporated herein by reference to Exhibit 10.18 filed with the Registrant’s Annual
Report on Form 10-K for the fiscal year ended April 29, 2000.
**10.17 — 1999 Stock Purchase and Option Plan of Weight Watchers International, Inc. and
Subsidiaries is incorporated herein by reference to Exhibit 10.19 filed with the
Registrant’s Annual Report on Form 10-K for the fiscal year ended April 29, 2000.
**10.18 — 2004 Stock Incentive Plan of Weight Watchers International, Inc. and its Subsidiaries is
incorporated herein by reference to Appendix A of the Registrant’s Definitive Proxy
Statement on Schedule 14A filed on April 8, 2004.
**10.19 — WeightWatchers.com Stock Incentive Plan of Weight Watchers International, Inc. and
Subsidiaries is incorporated herein by reference to Exhibit 10.20 filed with the
Registrant’s Annual Report on Form 10-K for the fiscal year ended April 29, 2000.
**10.20 — Warrant Agreement, dated as of November 24, 1999, between WeightWatchers.com, Inc.
and Weight Watchers International, Inc. is incorporated herein by reference to Exhibit
10.20 filed with Amendment No. 1 to the Registrant’s Registration Statement on
Form S-1 (File No. 333-69362) as filed on October 29, 2001.
**10.21 — Warrant Certificate of WeightWatchers.com No. 1, dated as of November 24, 1999 is
incorporated herein by reference to Exhibit 10.21 filed with Amendment No. 1 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-69362) as filed on
October 29, 2001.
**10.22 — Warrant Agreement, dated as of October 1, 2000, between WeightWatchers.com, Inc. and
Weight Watchers International, Inc. is incorporated herein by reference to Exhibit 10.2
filed with the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
October 28, 2000.
**10.23 — Warrant Certificate of WeightWatchers.com, Inc. No. 2, dated as of October 1, 2000 is
incorporated herein by reference to Exhibit 10.2 filed with the Registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended October 28, 2000.
**10.24 — Warrant Agreement, dated as of May 3, 2001, between WeightWatchers.com, Inc. and
Weight Watchers International, Inc. is incorporated herein by reference to Exhibit 10.2
filed with the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001.
**10.25 — Warrant Certificate of WeightWatchers.com, Inc., No. 3, dated as of May 3, 2001 is
incorporated herein by reference to Exhibit 10.3 filed with the Registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2001.
**10.26 — Warrant Agreement, dated as of September 10, 2001 between WeightWatchers.com, Inc.
and Weight Watchers International, Inc. is incorporated herein by reference to
Exhibit 10.29 filed with Amendment No. 1 to the Registrant’s Registration Statement on
Form S-1 (File No. 333-69362) as filed on October 29, 2001.
Exhibit
Number
Description
**10.27 — Warrant Certificate WeightWatchers.com, Inc. No. 4, dated as of September 10, 2001 is
incorporated herein by reference to Exhibit 10.30 filed with Amendment No. 1 to the
Registrant’s Registration Statement of Form S-1 (File No. 333-69362) as filed on
October 29, 2001.
**10.28 — Second Amended and Restated Note, dated as of October 1, 2000, by
WeightWatchers.com, Inc. to Weight Watchers International, Inc. is incorporated herein by
reference to Exhibit 10.24 filed with Amendment No. 1 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-69362) as filed on October 29, 2001.
**10.29 — Second Amended and Restated Collateral Assignment and Security Agreement, dated as
of September 10, 2001, by WeightWatchers.com, Inc. in favor of Weight Watchers
International, Inc. is incorporated herein by reference to Exhibit No. 10.31 filed with
Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (File
No. 333-69362) as filed on October 29, 2001.
**10.30 — Termination Agreement, dated as of November 5, 2001, between Weight Watchers
International, Inc. and Artal Luxembourg S.A. is incorporated herein by reference to
Exhibit No. 10.32 filed with Amendment No. 2 to the Registrant’s Registration Statement
on Form S-1 (File No. 333-69362) as filed on November 9, 2001.
**10.31 — Amended and Restated Co-Pack Agreement, dated as of September 13, 2001, between
Weight Watchers International, Inc. and Nellson Nutraceutical, Inc. is incorporated herein
by reference to Exhibit No. 10.33 filed with Amendment No. 1 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-69362) as filed on October 29, 2001.
**10.32 — Amended and Restated Intellectual Property License Agreement, dated as of
September 10, 2001, between Weight Watchers International, Inc. and
WeightWatchers.com, Inc. is incorporated herein by reference to Exhibit No. 10.34 filed
with Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File
No. 333-69362) as filed on November 9, 2001.
**10.33 — Service Agreement, dated as of September 10, 2001, between Weight Watchers
International, Inc. and WeightWatchers.com, Inc. is incorporated herein by reference to
Exhibit No. 10.35 filed with Amendment No. 2 to the Registrant’s Registration Statement
on Form S-1 (File No. 333-69362) as filed on November 9, 2001.
**10.34 — Corporate Agreement, dated as of September 10, 2001, between Weight Watchers
International, Inc. and WeightWatchers.com, Inc. and Artal Luxembourg S.A. is
incorporated herein by reference to Exhibit No. 10.36 filed with Amendment No. 2 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-69362) as filed on
November 9, 2001.
**10.35 — Registration Rights Agreement dated as of September 29, 1999, among Weight Watchers
International, Inc., H.J. Heinz Company and Artal Luxembourg S.A. is incorporated
herein by reference to Exhibit No. 10.38 filed with Amendment No. 1 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-69362) as filed on October 29, 2001.
**10.36 — Form of Continuity Agreement, dated as of October 10, 2003, between Weight Watchers
International, Inc. and certain key executives (Chief Executive Officer, Chief Financial
Officer and General Counsel).
**10.37 — Form of Continuity Agreement, dated as of October 10, 2003, between Weight Watchers
International, Inc. and certain key executives (certain other key executives).
**21. — Subsidiaries of Weight Watchers International, Inc. is incorporated herein by reference to
Exhibit 21 filed with Amendment No. 1 to the Registrant’s Registration Statement on
Form S-1 (File No. 333-69362) as filed on October 29, 2001.
Exhibit
Number
Description
*23.1 — Consent of Registered Public Accounting Firm.
*31.1 — Rule 13a-14(a) Certification by Linda Huett, President and Chief Executive Officer.
*31.2 — Rule 13a-14(a) Certification by Ann M. Sardini, Chief Financial Officer.
***32.1 — Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
***32.2 — Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
*
Filed herewith.
** Previously filed.
*** Pursuant to Commission Release No. 33-8212, this certification will be treated as ‘‘accompanying’’
this Form 10-K and not ‘‘filed’’ as part of such report for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liability of Section 18 of the Exchange Act and this certification
will not be deemed to be incorporated by reference into any filing, under the Securities Act of
1933, as amended, or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on his behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
WEIGHT WATCHERS INTERNATIONAL, INC.
DATE: MARCH 17, 2005
BY:
/S/ LINDA HUETT
Linda Huett
President, Chief Executive Officer and Director
(Principal Executive Officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Date: March 17, 2005
By:
/s/ LINDA HUETT
Linda Huett
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 17, 2005
By:
/s/ ANN M. SARDINI
Ann M. Sardini
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 17, 2005
By:
/s/ RAYMOND DEBBANE
Raymond Debbane
Director
Date: March 17, 2005
By:
/s/ JONAS M. FAJGENBAUM
Jonas M. Fajgenbaum
Director
Date: March 17, 2005
By:
/s/ SACHA LAINOVIC
Sacha Lainovic
Director
Date: March 17, 2005
By:
/s/ CHRISTOPHER J. SOBECKI
Christopher J. Sobecki
Director
Date: March 17, 2005
By:
/s/ SAM K. REED
Sam K. Reed
Director
Date: March 17, 2005
By:
/s/ MARSHA JOHNSON EVANS
Marsha Johnson Evans
Director
Date: March 17, 2005
By:
/s/ JOHN F. BARD
John F. Bard
Director
Date: March 17, 2005
By:
/s/ PHILIPPE J. AMOUYAL
Philippe J. Amouyal
Director
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8
(No. 333-74066) of Weight Watchers International, Inc. of our report dated March 11, 2005 relating to
the financial statements, financial statement schedule, management’s assessment of the effectiveness of
internal control over financial reporting and the effectiveness of internal control over financial
reporting, which appears in this Form 10-K.
EXHIBIT 23.1
PricewaterhouseCoopers LLP
New York, New York
March 16, 2005
CERTIFICATIONS
EXHIBIT 31.1
I, Linda Huett, President and Chief Executive Officer of Weight Watchers International, Inc., certify
that:
1.
I have reviewed this annual report on Form 10-K of Weight Watchers International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in
this annual report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this annual
report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this annual report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered by this annual report based
on such evaluation; and
(d) Disclosed in this annual report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s fourth fiscal quarter that has
materially affected, or in reasonably likely to materially affect, the registrant’s internal
control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the
Audit Committee of the registrant’s Board of Directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date: March 17, 2005
Signature: /s/ LINDA HUETT
Linda Huett
President, Chief Executive Officer and Director
(Principal Executive Officer)
CERTIFICATIONS
EXHIBIT 31.2
I, Ann M. Sardini, Chief Financial Officer of Weight Watchers International, Inc., certify that:
1.
I have reviewed this annual report on Form 10-K of Weight Watchers International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in
this annual report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this annual
report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this annual report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered by this annual report based
on such evaluation; and
(d) Disclosed in this annual report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s fourth fiscal quarter that has
materially affected, or in reasonably likely to materially affect, the registrant’s internal
control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the
Audit Committee of the registrant’s Board of Directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date: March 17, 2005
Signature: /s/ ANN M. SARDINI
Ann M. Sardini
Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Weight Watchers International, Inc. (the ‘‘Company’’) on
Form 10-K for the year ending January 1, 2005 as filed with the Securities and Exchange Commission
on the date hereof (the ‘‘Report’’), I, Linda Huett, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial
condition and result of operations of the Company.
Date: March 17, 2005
Signature:
/s/ LINDA HUETT
Linda Huett
President, Chief Executive Officer and Director
(Principal Executive Officer)
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Weight Watchers International, Inc. (the ‘‘Company’’) on
Form 10-K for the year ending January 1, 2005 as filed with the Securities and Exchange Commission
on the date hereof (the ‘‘Report’’), I, Ann M. Sardini, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial
condition and result of operations of the Company.
Date: March 17, 2005
Signature:
/s/ ANN M. SARDINI
Ann M. Sardini
Chief Financial Officer
(Principal Financial and Accounting Officer)
Corporate and Stockholder Information
Annual Meeting
The Annual Meeting of Shareholders of Weight Watchers
International, Inc. will be held at the Garden City Hotel,
45 Seventh Street, Garden City, NY 11530 on
Friday, April 29, 2005, at 10 a.m. eastern time.
Corporate Headquarters
Weight Watchers International, Inc.
175 Crossways Park West
Woodbury, NY 11797-2055
www.weightwatchersinternational.com
Common Stock
New York Stock Exchange Symbol: WTW
Shareholder Relations
Robert W. Hollweg
Corporate Secretary
(516) 390-1400
Transfer Agent and Registrar
Questions regarding stock holdings, certificate replacement/transfer,
and address changes should be directed to:
EquiServe Trust Company
150 Royall St.
Canton, MA 02021
(781) 575-3400
www.EquiServe.com
Auditors
PricewaterhouseCoopers, LLP
Investor Relations
Brainerd Communicators, Inc.
521 Fifth Avenue, 8th floor
New York, NY 10175
Tel: (212) 986-6667
Fax: (212) 986-8302
Weight Watchers Magazine
is published in many countries
around the world.
Here are some examples.
The United States version
is in the center. Also featured are
Germany, Finland, France, Netherlands,
Australia and England.
WWA-AR-05